Risk-Sensitive Investment in a Market with Animal Spirits

24 Pages Posted: 5 Aug 2014

See all articles by Grzegorz Andruszkiewicz

Grzegorz Andruszkiewicz

Imperial College London

Mark Davis

Imperial College London

Sebastien Lleo

NEOMA Business School

Date Written: July 20, 2014

Abstract

A new jump diffusion regime-switching model is introduced, which allows for linking jumps in asset prices with regime changes. We prove the existence and uniqueness of the solution to the risk-sensitive asset management criterion maximisation problem in this setting. We provide an ODE for the optimal value function, which may be efficiently solved numerically. Relevant probability measure changes are discussed in the appendix. The approach of Klebaner & Lipster (2014) is used to prove the martingale property of the relevant density processes.

Keywords: jump-diffusion processes, Markov chains, piecewise deterministic process, risk-sensitive control, animal spirits, fund separation result, Kelly strategies.

JEL Classification: C61, G11

Suggested Citation

Andruszkiewicz, Grzegorz and Davis, Mark and Lleo, Sebastien, Risk-Sensitive Investment in a Market with Animal Spirits (July 20, 2014). Available at SSRN: https://ssrn.com/abstract=2476017 or http://dx.doi.org/10.2139/ssrn.2476017

Grzegorz Andruszkiewicz

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Mark Davis

Imperial College London ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom
02075948486 (Phone)

HOME PAGE: http://www.ma.ic.ac.uk/~mdavis

Sebastien Lleo (Contact Author)

NEOMA Business School ( email )

Reims
France

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