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.
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 language | English |
|---|---|
| Article number | 13 |
| Pages (from-to) | 487-504 |
| Number of pages | 18 |
| Journal | Journal of Industrial and Management Optimization |
| Volume | 9 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - Apr 2013 |
Keywords
- portfolio selection
- self-exciting threshold model
- regime switching
- power utility
- logarithmic utility