Optimal portfolio choice for unobservable and regime-switching mean returns
✍ Scribed by Toshiki Honda
- Publisher
- Elsevier Science
- Year
- 2003
- Tongue
- English
- Weight
- 373 KB
- Volume
- 28
- Category
- Article
- ISSN
- 0165-1889
No coin nor oath required. For personal study only.
✦ Synopsis
We study dynamic optimal consumption and portfolio choice for a setting in which the mean returns of a risky asset depend on an unobservable regime variable of the economy, which is deÿned as a continuous-time Markov chain. The investor estimates the current regime by observing past and present asset prices. We compute the optimal consumption and portfolio policies of an investor with power utility. The optimal consumption/portfolio rule of a long-time-horizon investor could be substantially di erent from that of a short-time-horizon investor. The di erence is caused by an investor's hedging demand of assets against uctuations in the estimated mean returns.