Optimal portfolio in a continuous-time self-exciting threshold model

Hui Meng, Fei Lung Yuen, Tak Kuen Siu, Hailiang Yang

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

This paper discusses an optimal portfolio selection problem in a continuous-time
economy, where the price dynamics of a risky asset are governed by a continuous-time self-exciting threshold model. This model provides a way to describe the effect of regime switching on price dynamics via the self-exciting threshold principle. Its main advantage is to incorporate the regime switching effect without introducing an additional source of uncertainty. A martingale approach is used to discuss the problem. Analytical solutions are derived in some special cases. Numerical examples are given to illustrate the regime-switching effect described by the proposed model.
Original languageEnglish
Article number13
Pages (from-to)487-504
Number of pages18
JournalJournal of Industrial and Management Optimization
Volume9
Issue number2
DOIs
Publication statusPublished - Apr 2013

Keywords

  • portfolio selection
  • self-exciting threshold model
  • regime switching
  • power utility
  • logarithmic utility

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