Researcher:
Çanakoğlu, Ethem

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Ethem

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Çanakoğlu

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Çanakoğlu, Ethem

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2009 - 200912010 - 20122

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    Portfolio selection with imperfect information: a hidden Markov model
    (Wiley-Blackwell, 2011) N/A; Department of Industrial Engineering; Çanakoğlu, Ethem; Özekici, Süleyman; Researcher; Faculty Member; Department of Industrial Engineering; Graduate School of Social Sciences and Humanities; College of Engineering; 114906; 32631
    We consider a utility-based portfolio selection problem, where the parameters change according to a Markovian market that cannot be observed perfectly. The market consists of a riskless and many risky assets whose returns depend on the state of the unobserved market process. The states of the market describe the prevailing economic, financial, social, political or other conditions that affect the deterministic and probabilistic parameters of the model. However, investment decisions are based on the information obtained by the investors. This constitutes our observation process. Therefore, there is a Markovian market process whose states are unobserved, and a separate observation process whose states are observed by the investors who use this information to determine their portfolios. There is, of course, a probabilistic relation between the two processes. The market process is a hidden Markov chain and we use sufficient statistics to represent the state of our financial system. The problem is solved using the dynamic programming approach to obtain an explicit characterization of the optimal policy and the value function. In particular, the return-risk frontiers of the terminal wealth are shown to have linear forms. Copyright (C) 2011 John Wiley & Sons, Ltd.
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    HARA frontiers of optimal portfolios in stochastic markets
    (Elsevier, 2012) N/A; Department of Industrial Engineering; Çanakoğlu, Ethem; Özekici, Süleyman; Researcher; Faculty Member; Department of Industrial Engineering; Graduate School of Social Sciences and Humanities; College of Engineering; 114906; 32631
    In this paper, we consider the optimal portfolio selection problem in continuous-time settings where the investor maximizes the expected utility of the terminal wealth in a stochastic market. The utility function has the structure of the HARA family and the market states change according to a Markov process. The states of the market describe the prevailing economic, financial, social and other conditions that affect the deterministic and probabilistic parameters of the model. This includes the distributions of the random asset returns as well as the utility function. We analyzed Black-Scholes type continuous-time models where the market parameters are driven by Markov processes. The Markov process that affects the state of the market is independent of the underlying Brownian motion that drives the stock prices. The problem of maximizing the expected utility of the terminal wealth is investigated and solved by stochastic optimal control methods for exponential, logarithmic and power utility functions. We found explicit solutions for optimal policy and the associated value functions. We also constructed the optimal wealth process explicitly and discussed some of its properties. In particular, it is shown that the optimal policy provides linear frontiers. (C) 2011 Elsevier B.V. All rights reserved.
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    Portfolio selection in stochastic markets with exponential utility functions
    (Springer, 2009) N/A; Department of Industrial Engineering; Çanakoğlu, Ethem; Özekici, Süleyman; Researcher; Faculty Member; Department of Industrial Engineering; Graduate School of Social Sciences and Humanities; College of Engineering; 114906; 32631
    We consider the optimal portfolio selection problem in a multiple period setting where the investor maximizes the expected utility of the terminal wealth in a stochastic market. The utility function has an exponential structure and the market states change according to a Markov chain. The states of the market describe the prevailing economic, financial, social and other conditions that affect the deterministic and probabilistic parameters of the model. This includes the distributions of the random asset returns as well as the utility function. The problem is solved using the dynamic programming approach to obtain the optimal solution and an explicit characterization of the optimal policy. We also discuss the stochastic structure of the wealth process under the optimal policy and determine various quantities of interest including its Fourier transform. The exponential return-risk frontier of the terminal wealth is shown to have a linear form. Special cases of multivariate normal and exponential returns are disussed together with a numerical illustration.