Advances in Applied Probability

Markov decision process algorithms for wealth allocation problems with defaultable bonds

Iker Perez, David Hodge, and Huiling Le

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Abstract

In this paper we are concerned with analysing optimal wealth allocation techniques within a defaultable financial market similar to Bielecki and Jang (2007). We study a portfolio optimization problem combining a continuous-time jump market and a defaultable security; and present numerical solutions through the conversion into a Markov decision process and characterization of its value function as a unique fixed point to a contracting operator. In this paper we analyse allocation strategies under several families of utility functions, and highlight significant portfolio selection differences with previously reported results.

Article information

Source
Adv. in Appl. Probab., Volume 48, Number 2 (2016), 392-405.

Dates
First available in Project Euclid: 9 June 2016

Permanent link to this document
https://projecteuclid.org/euclid.aap/1465490754

Mathematical Reviews number (MathSciNet)
MR3511767

Zentralblatt MATH identifier
06606991

Subjects
Primary: 91G10: Portfolio theory
Secondary: 90C40: Markov and semi-Markov decision processes

Keywords
Portfolio optimization defaultable bond Markov decision process

Citation

Perez, Iker; Hodge, David; Le, Huiling. Markov decision process algorithms for wealth allocation problems with defaultable bonds. Adv. in Appl. Probab. 48 (2016), no. 2, 392--405. https://projecteuclid.org/euclid.aap/1465490754


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