Abstract
Asset allocation with a derivative security is studied in a hidden, Markovian regimeswitching, economy using filtering theory and the martingale approach. A generalized
delta-hedged ratio and a generalized elasticity of an option are introduced to accommodate the presence of the information state process and the derivative security. Malliavin
calculus is applied to derive a solution for a general utility function which includes
an exponential utility, a power utility, and a logarithmic utility. A compact solution
is obtained for a logarithmic utility. Some economic implications of the solutions are
discussed.
delta-hedged ratio and a generalized elasticity of an option are introduced to accommodate the presence of the information state process and the derivative security. Malliavin
calculus is applied to derive a solution for a general utility function which includes
an exponential utility, a power utility, and a logarithmic utility. A compact solution
is obtained for a logarithmic utility. Some economic implications of the solutions are
discussed.
| Original language | English |
|---|---|
| Pages (from-to) | 723-749 |
| Journal | Journal of Applied Probability |
| Volume | 56 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 2019 |
| Externally published | Yes |