Along but beyond mean-variance: Utility maximization in a semimartingale model

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Along but beyond mean-variance: Utility maximization in a semimartingale model

Author Info

Huhtala, Heli () (Bank of Finland Research)

Abstract

It is well known that under certain assumptions the strategy of an investor maximizing his expected utility coincides with the mean-variance optimal strategy. In this paper we show that the two strategies are not equal in general and find the connection between a utility maximizing and a mean-variance optimal strategy in a continuous semimartingale model. That is done by showing that the utility maximizing strategy of a CARA investor can be expressed in terms of expectation and the expected quadratic variation of the underlying price process. It coincides with the mean-variance optimal strategy if the underlying price process is a local martingale.

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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 5/2008.

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Length: 29 pages
Date of creation: 11 Mar 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_005

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-03-15 (All new papers)
NEP-UPT-2008-03-15 (Utility Models & Prospect Theory)

References listed on IDEAS
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Other versions:
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Other versions:
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Other versions:
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," NBER Working Papers 8160, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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