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Optimal consumption and investment under partial information

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Abstract

We consider a stock market model where prices satisfy a stochastic differential equation with a stochastic drift process. The investor’s objective is to maximize the expected utility of consumption and terminal wealth under partial information; the latter meaning that investment decisions are based on the knowledge of the stock prices only. We derive explicit representations of optimal consumption and trading strategies using Malliavin calculus. The results apply to both classical models for the drift process, a mean reverting Ornstein-Uhlenbeck process and a continuous time Markov chain. The model can be transformed to a complete market model with full information. This allows to use results on optimization under convex constraints which are used in the numerical part for the implementation of more stable strategies.

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Authors and Affiliations

  1. RICAM, Austrian Academy of Sciences, Altenberger Str. 69, 4040, Linz, Austria

    Wolfgang Putschögl & Jörn Sass

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  1. Wolfgang Putschögl
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  2. Jörn Sass
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Correspondence to Jörn Sass.

Additional information

Supported by the Austrian Science Fund FWF, project P17947-N12. We thank two anonymous referees for their comments which led to a considerable improvement of the paper.

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Putschögl, W., Sass, J. Optimal consumption and investment under partial information. Decisions Econ Finan 31, 137–170 (2008). https://doi.org/10.1007/s10203-008-0082-3

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  • DOI: https://doi.org/10.1007/s10203-008-0082-3

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