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An optimal consumption and investment problem with partial information

  • Hiroaki Hata (a1) and Shuenn-Jyi Sheu (a2)

Abstract

We consider a finite-time optimal consumption problem where an investor wants to maximize the expected hyperbolic absolute risk aversion utility of consumption and terminal wealth. We treat a stochastic factor model in which the mean returns of risky assets depend linearly on underlying economic factors formulated as the solutions of linear stochastic differential equations. We discuss the partial information case in which the investor cannot observe the factor process and uses only past information of risky assets. Then our problem is formulated as a stochastic control problem with partial information. We derive the Hamilton–Jacobi–Bellman equation. We solve this equation to obtain an explicit form of the value function and the optimal strategy for this problem. Moreover, we also introduce the results obtained by the martingale method.

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Copyright

Corresponding author

* Postal address: Department of Mathematics, Faculty of Education, Shizuoka University, Ohya, Shizuoka, 422-852, Japan. Email address: hata@shizuoka.ac.jp
** Postal address: Department of Mathematics, National Central University, Chung-Li, 320-54, Taiwan. Email address: sheusj@math.ncu.edu.tw

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