The value of knowing the market price of risk

We study an optimal allocation problem in a financial market with one risk-free and one risky asset, when the market is driven by a stochastic market price of risk. The problem is set in continuous time, for an investor with a constant relative risk aversion utility, under two scenarios: when the ma...

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Veröffentlicht in:Annals of operations research Jg. 299; H. 1-2; S. 101 - 131
Hauptverfasser: Colaneri, Katia, Herzel, Stefano, Nicolosi, Marco
Format: Journal Article
Sprache:Englisch
Veröffentlicht: New York Springer US 01.04.2021
Springer
Springer Nature B.V
Schlagworte:
Analysis
Business and Management
Combinatorics
Expected utility
Financial markets
Insider trading in securities
Investment policy
Investments
Investors
Market prices
Operations research
Operations Research/Decision Theory
Optimization
Partial differential equations
Prices and rates
Risk
Risk (Economics)
S.I.: Recent Developments in Financial Modeling and Risk Management
Theory of Computation
Italy
Portfolio optimization
Partial information
Martingale method
Power utility
ISSN:0254-5330, 1572-9338
Online-Zugang:Volltext
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Beschreibung
Zusammenfassung:We study an optimal allocation problem in a financial market with one risk-free and one risky asset, when the market is driven by a stochastic market price of risk. The problem is set in continuous time, for an investor with a constant relative risk aversion utility, under two scenarios: when the market price of risk is observable ( the full information case ), and when it is not ( the partial information case ). The corresponding market models are complete in the partial information case and incomplete under full information. We study how the access to more accurate information on the market price of risk affects the optimal strategies and we determine the maximum price that the investor would be willing to pay to receive such information. In particular, we examine two cases of additional information, when an exact observation of the market price of risk is available either at time 0 only (the initial information case ), or during the whole investment period (the dynamic information case ).
Bibliographie:ObjectType-Article-1
SourceType-Scholarly Journals-1
ObjectType-Feature-2
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ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-020-03596-7