Title: Explicit solutions to utility maximization problems in a regime-switching market model via Laplace transforms,
Abstract: We study the problem of utility maximization from terminal wealth in which an
agent optimally builds her portfolio by investing in a bond and a risky asset.
The asset price dynamics follow a diffusion process with regime-switching
coefficients modeled by a continuous-time finite-state Markov chain. We
consider an investor with a Constant Relative Risk Aversion (CRRA) utility
function. We deduce the associated Hamilton-Jacobi-Bellman equation to
construct the solution and the optimal trading strategy and verify optimality
by showing that the value function is the unique constrained viscosity solution
of the HJB equation. By means of a Laplace transform method, we show how to
explicitly compute the value function and illustrate the method with the two-
and three-states cases. This method is interesting in its own right and can be
adapted in other applications involving hybrid systems and using other types of
transforms with basic properties similar to the Laplace transform.