Markov decision process algorithms for wealth allocation problems with defaultable bonds
Pérez López, Iker and Hodge, David and Le, Huiling (2016) Markov decision process algorithms for wealth allocation problems with defaultable bonds. Advances in Applied Probability, 48 (2). pp. 392-405. ISSN 1475-6064
Official URL: https://www.cambridge.org/core/journals/advances-in-applied-probability/article/div-classtitlemarkov-decision-process-algorithms-for-wealth-allocation-problems-with-defaultable-bondsdiv/8FEE0154696E0725DBDE8AEA7AA03838
This paper is concerned with analysing optimal wealth allocation techniques within a defaultable financial market similar to Bielecki and Jang (2007). It studies a portfolio optimization problem combining a continuous-time jump market and a defaultable security; and presents 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. This work analyses allocation strategies under several families of utilities functions, and highlights significant portfolio selection differences with previously reported results.
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