BSDEs in Utility Maximization with BMO Market Price of Risk
AbstractThis article studies quadratic semimartingale BSDEs arising in power utility maximization when the market price of risk is of BMO type. In a Brownian setting we provide a necessary and sufficient condition for the existence of a solution but show that uniqueness fails to hold in the sense that there exists a continuum of distinct square-integrable solutions. This feature occurs since, contrary to the classical Ito representation theorem, a representation of random variables in terms of stochastic exponentials is not unique. We study in detail when the BSDE has a bounded solution and derive a new dynamic exponential moments condition which is shown to be the minimal sufficient condition in a general filtration. The main results are complemented by several interesting examples which illustrate their sharpness as well as important properties of the utility maximization BSDE.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1107.0183.
Date of creation: Jul 2011
Date of revision: Feb 2012
Publication status: Published in Stochastic Process. Appl., 122 (6): 2486 - 2519, 2012
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