Quantcast

Optimal portfolio selection in an It\^o-Markov additive market

Research paper by Zbigniew Palmowski, Łukasz Stettner, Anna Sulima

Indexed on: 09 Jun '18Published on: 09 Jun '18Published in: arXiv - Quantitative Finance - Portfolio Management



Abstract

We study a portfolio selection problem in a continuous-time It\^o-Markov additive market with prices of financial assets described by Markov additive processes which combine L\'evy processes and regime switching models. Thus the model takes into account two sources of risk: the jump diffusion risk and the regime switching risk. For this reason the market is incomplete. We complete the market by enlarging it with the use of a set of Markovian jump securities, Markovian power-jump securities and impulse regime switching securities. Moreover, we give conditions under which the market is asymptotic-arbitrage-free. We solve the portfolio selection problem in the It\^o-Markov additive market for the power utility and the logarithmic utility.