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Martingale approach to optimal portfolio-consumption problems in Markov-modulated pure-jump models

    Research output: Contribution to Journal › Research Article › peer-review

    Abstract

    We study optimal investment strategies that maximize expected utility from consumption and terminal wealth in a pure-jump asset price model with Markov-modulated (regime switching) jump-size distributions. We give sufficient conditions for existence of optimal policies and find closed-form expressions for the optimal value function for agents with logarithmic and fractional power (CRRA) utility in the case of two-state Markov chains. The main tools are convex duality techniques, stochastic calculus for pure-jump processes, and explicit formulae for the moments of telegraph processes with Markov-modulated random jumps.

    Original languageEnglish (US)
    Pages (from-to)261-291
    Number of pages31
    JournalStochastic Models
    Volume31
    Issue number2
    DOIs
    StatePublished - Apr 3 2015

    All Science Journal Classification (ASJC) codes

    • Statistics and Probability
    • Modeling and Simulation
    • Applied Mathematics

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