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Martingale and Relaxation-Projection Methods for Utility Maximization with Portfolio Constraints and Stochastic Income

Author

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  • Yunhong Yang

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University)

Abstract

The problem of maximizing the expected utility from terminal wealth in the presence of a stochastic endowment and constraints on the portfolio choices is examined. We model short-sale and borrowing constraints, as well as incomplete markets, as special cases of constraints. The existence of optimal policies is established under fairly general assumptions on the security price coefficients and the individual's utility function. This result is obtained by using martingale techniques to reformulate the individual's dynamic optimization problem as an equivalent static one.

Suggested Citation

  • Yunhong Yang, 2000. "Martingale and Relaxation-Projection Methods for Utility Maximization with Portfolio Constraints and Stochastic Income," Annals of Economics and Finance, Society for AEF, vol. 1(1), pages 117-146, May.
    • Handle: RePEc:cuf:journl:y:2000:v:1:i:1:p:117-146
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    More about this item

    Keywords

    Portfolio constraints; Stochastic income; Relaxation-projection methods;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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