Optimal Solution of Investment Problems Via Linear Parabolic Equations Generated by Kalman Filter

25 Pages Posted: 31 Mar 2005

See all articles by Nikolai Dokuchaev

Nikolai Dokuchaev

Zhejiang University/University of Illinois at Urbana-Champaign Institute

Date Written: January 12, 2005

Abstract

We consider optimal investment problems for a diffusion market model with non-observable random drifts that evolve as an Ito's process. Admissible strategies do not use direct observations of the market parameters, but rather use historical stock prices. For a non-linear problem with a general performance criterion, the optimal portfolio strategy is expressed via the solution of a scalar minimization problem and a linear parabolic equation with coefficients generated by the Kalman filter.

Keywords: Optimal portfolio, non-observable parameters, Kalman filter

JEL Classification: D52, D81, D84, G11

Suggested Citation

Dokuchaev, Nikolai, Optimal Solution of Investment Problems Via Linear Parabolic Equations Generated by Kalman Filter (January 12, 2005). Available at SSRN: https://ssrn.com/abstract=680463 or http://dx.doi.org/10.2139/ssrn.680463

Nikolai Dokuchaev (Contact Author)

Zhejiang University/University of Illinois at Urbana-Champaign Institute ( email )

Haining
Zhejiang
China