Long run risk sensitive portfolio with general factors

TL;DR

This paper develops a long-term risk-sensitive portfolio optimization framework considering ergodic economic factors, providing solutions via Bellman equations and illustrating with market model examples.

Contribution

It introduces a novel approach to portfolio optimization with non-uniform ergodic factors using local span contraction methods.

Findings

Optimal strategies are explicitly characterized.

The approach applies to a broad class of market models.

Examples demonstrate the practical relevance of the theoretical results.

Abstract

In the paper portfolio optimization over long run risk sensitive criterion is considered. It is assumed that economic factors which stimulate asset prices are ergodic but non necessarily uniformly ergodic. Solution to suitable Bellman equation using local span contraction with weighted norms is shown. The form of optimal strategy is presented and examples of market models satisfying imposed assumptions are shown.