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Optimality And State Pricing In Constrained Financial Markets With Recursive Utility Under Continuous And Discontinuous Information

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  • Mark Schroder
  • Costis Skiadas

Abstract

We study marginal pricing and optimality conditions for an agent maximizing generalized recursive utility in a financial market with information generated by Brownian motion and marked point processes. The setting allows for convex trading constraints, non‐tradable income, and non‐linear wealth dynamics. We show that the FBSDE system of the general optimality conditions reduces to a single BSDE under translation or scale invariance assumptions, and we identify tractable applications based on quadratic BSDEs. An appendix relates the main optimality conditions to duality.

Suggested Citation

  • Mark Schroder & Costis Skiadas, 2008. "Optimality And State Pricing In Constrained Financial Markets With Recursive Utility Under Continuous And Discontinuous Information," Mathematical Finance, Wiley Blackwell, vol. 18(2), pages 199-238, April.
    • Handle: RePEc:bla:mathfi:v:18:y:2008:i:2:p:199-238
    DOI: 10.1111/j.1467-9965.2007.00330.x
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    Cited by:

    1. Fabio Antonelli & Carlo Mancini, 2016. "Consumption optimization for recursive utility in a jump-diffusion model," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 39(2), pages 293-310, November.
    2. Johnson Kakeu, 2016. "Exhaustibility and Risk as Asset Class Dimensions: A Social Investor Approach to Capital-Resource Economies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(4), pages 677-695, December.
    3. Mauricio Junca & Rafael Serrano, 2014. "Utility maximization in pure-jump models driven by marked point processes and nonlinear wealth dynamics," Papers 1411.1103, arXiv.org, revised Sep 2015.
    4. Costis Skiadas, 2015. "Dynamic choice with constant source-dependent relative risk aversion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(3), pages 393-422, November.
    5. Yu Chen & Thomas Cosimano & Alex Himonas & Peter Kelly, 2014. "An Analytic Approach for Stochastic Differential Utility for Endowment and Production Economies," Computational Economics, Springer;Society for Computational Economics, vol. 44(4), pages 397-443, December.
    6. Holger Kraft & Thomas Seiferling & Frank Thomas Seifried, 2017. "Optimal consumption and investment with Epstein–Zin recursive utility," Finance and Stochastics, Springer, vol. 21(1), pages 187-226, January.
    7. Holger Kraft & Frank Seifried & Mogens Steffensen, 2013. "Consumption-portfolio optimization with recursive utility in incomplete markets," Finance and Stochastics, Springer, vol. 17(1), pages 161-196, January.

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