A Benchmark Approach to Portfolio Optimization under Partial Information

• Published in: Asia-Pacific financial markets Vol. 14; no. 1; pp. 25 - 43
• Main Authors: Runggaldier, Wolfgang, Platen, Eckhard
• Format: Journal Article
• Language: English
• Published: Dordrecht Springer 01.03.2007; Springer Nature B.V
• Series: Asia-Pacific Financial Markets
• Subjects: 62P20; Expected utility; Expected utility maximization; Filtering; G10; G13; Growth optimal portfolio; Market prices; Mathematical models; Optimization; Partial information; Portfolio management; Portfolio optimization; Pricing policies; Primary 90A12; Real world pricing formula; Savings accounts; Secondary 60G30; Securities markets; Studies; Utility indifference pricing
• ISSN: 1387-2834; 1573-6946
• DOI: 10.1007/s10690-007-9045-x

This paper proposes a filtering methodology for portfolio optimization when some factors of the underlying model are only partially observed. The level of information is given by the observed quantities that are here supposed to be the primary securities and empirical log-price covariations. For a given level of information we determine the growth optimal portfolio, identify locally optimal portfolios that are located on a corresponding Markowitz efficient frontier and present an approach for expected utility maximization. We also present an expected utility indifference pricing approach under partial information for the pricing of nonreplicable contracts. This results in a real world pricing formula under partial information that turns out to be independent of the subjective utility of the investor and for which an equivalent risk neutral probability measure need not exist. [PUBLICATION ABSTRACT]