Risk-sensitive portfolio optimization problems for hidden Markov factors on infinite time horizon

Abstract

We consider a market model where risky securities are affected by “hidden” economic factors, which evolve as a finite-state Markov chain. Our problem is optimizing an expected risk-averse power utility of wealth on finite and infinite time horizons. We construct a classical solution of the Hamilton–Jacobi–Bellman equation corresponding to the problem. We also prove some verification theorems.