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Portfolio optimization with Markov-modulated stock prices and interest rates

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2 Author(s)
Bauerle, N. ; Abt. fur Math. VII, Univ. Ulm, Germany ; Rieder, U.

A financial market with one bond and one stock is considered where the risk free interest rate, the appreciation rate of the stock and the volatility of the stock depend on an external finite state Markov chain. We investigate the problem of maximizing the expected utility from terminal wealth and solve it by stochastic control methods for different utility functions. Due to explicit solutions it is possible to compare the value function of the problem to one where we have constant (average) market data. The case of benchmark optimization is also considered.

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Automatic Control, IEEE Transactions on  (Volume:49 ,  Issue: 3 )