Optimal portfolio with unobservable market parameters and certainty equivalence principle

Abstract

We consider a multi-stock continuous time incomplete market model with random coefficients. We study the investment problem in the class of strategies which do not use direct observations of the appreciation rates of the stocks, but rather use historical stock prices and an a priory given distribution of the appreciation rates. An explicit solution is found for case of power utilities and for a case when the problem can be embedded to a Markovian setting. Some new estimates and filters for the appreciation rates are given.