Markov decision process algorithms for wealth allocation problems with defaultable bonds

P�rez L�pez, Iker; Hodge, David; Le, Huiling

Abstract

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.

Citation

Pérez López, I., Hodge, D., & Le, H. (in press). Markov decision process algorithms for wealth allocation problems with defaultable bonds. Advances in Applied Probability, 48(2), https://doi.org/10.1017/apr.2016.6

• Journal Article Type: Article
• Acceptance Date: Aug 13, 2015
• Online Publication Date: Jun 10, 2016
• Deposit Date: Dec 10, 2015
• Publicly Available Date: Jun 10, 2016
• Journal: Advances in Applied Probability
• Print ISSN: 0001-8678
• Electronic ISSN: 1475-6064
• Publisher: Applied Probability Trust
• Peer Reviewed: Not Peer Reviewed
• Volume: 48
• Issue: 2
• DOI: https://doi.org/10.1017/apr.2016.6
• Keywords: Portfolio Optimization; Defaultable Bonds; Markov Decision Processes
• Public URL: https://nottingham-repository.worktribe.com/output/795771
• Publisher 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
• Additional Information: © Cambridge University Press 2016