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Risk sensitive control of finite state Markov chains in discrete time, with applications to portfolio management |
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| Authors: | Tomasz Bielecki Daniel Hernández-Hernández Stanley R Pliska |
| Institution: | (1) Department of Mathematics, The Northeastern Illinois University, 5500 N. St. Louis Ave., Chicago, IL 60625-4699, USA (e-mail: T-Bielecki@neiu.edu), US;(2) Departamento de Matematicas, CINVESTAV-IPN, Apartado Postal 14-740, 07000 Mexico, D.F., Mexico (e-mail: dher@math.cinvestav.mx), MX;(3) Department of Finance, University of Illinois at Chicago, 601 S. Morgan St., Chicago, IL 60607-7124, USA (e-mail: srpliska@uic.edu), US |
| Abstract: | In this paper we extend standard dynamic programming results for the risk sensitive optimal control of discrete time Markov chains to a new class of models. The state space is only finite, but now the assumptions about the Markov transition matrix are much less restrictive. Our results are then applied to the financial problem of managing a portfolio of assets which are affected by Markovian microeconomic and macroeconomic factors and where the investor seeks to maximize the portfolio's risk adjusted growth rate. |
| Keywords: | : Risk sensitive Markov decision processes portfolio optimization factor modeling |
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