When: 10:00 am, April 29

Where: Classroom C, Third Floor, Building 25-A, Peiyangyuan Campus

Lecturer: Liu Ruihua,Professor of the University of Dayton

About the Lecture: Regime-switching models have drawn considerable attention in recent years in mathematical finance  due to their capability of capturing the changes of macroeconomic conditions by allowing model parameters (e.g. stock volatility and interest rate) to depend on market regimes. In this setup, asset prices are dictated by a number of stochastic differential equations coupled by a finite-state Markov chain, which represents randomly changing economical factors. Model parameters are assumed to depend on the Markov chain and are allowed to take different values in different regimes. As a result, both continuous dynamics and discrete events are present in  the regime-switching models. 

In this talk we present our recent results on portfolio optimization using regime-switching models for both stock price and interest rate.  Two portfolio optimization problems (a portfolio of stock and savings account and a portfolio of mixed stock, bond and savings account)  are considered and  closed-form solutions are obtained for a regime-switching power utility function. A class of stochastic optimal control problems with Markovian regime-switching is formulated for which a verification theorem is provided. Numerical results are provided to illustrate the impact of regime-switching on the optimal investment decisions. We also mention some recent and on-going work in this direction. 

All students and staff of Tianjin University are welcome.