Stability of utility-maximization in incomplete markets
The effectiveness of utility-maximization techniques for portfolio management relies on our ability to estimate correctly the parameters of the dynamics of the underlying financial assets. In the setting of complete or incomplete financial markets, we investigate whether small perturbations of the market coefficient processes lead to small changes in the agent's optimal behavior, as derived from the solution of the related utility-maximization problems. Specifically, we identify the topologies on the parameter process space and the solution space under which utility-maximization is a continuous operation, and we provide a counterexample showing that our results are best possible, in a certain sense. A novel result about the structure of the solution of the utility-maximization problem, where prices are modeled by continuous semimartingales, is established as an offshoot of the proof of our central theorem.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 117 (2007)
Issue (Month): 11 (November)
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/505572/description#description|
|Order Information:|| Postal: http://http://www.elsevier.com/wps/find/supportfaq.cws_home/regional|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Friedrich Hubalek & Walter Schachermayer, 1998. "When Does Convergence of Asset Price Processes Imply Convergence of Option Prices?," Mathematical Finance, Wiley Blackwell, vol. 8(4), pages 385-403.
- Hua He & Neil D. Pearson, 1991.
"Consumption and Portfolio Policies With Incomplete Markets and Short-Sale Constraints: the Finite-Dimensional Case,"
Wiley Blackwell, vol. 1(3), pages 1-10.
- He, Hua & Pearson, Neil D., 1991. "Consumption and portfolio policies with incomplete markets and short-sale constraints: The infinite dimensional case," Journal of Economic Theory, Elsevier, vol. 54(2), pages 259-304, August.
- Hua He and Neil D. Pearson., 1989. "Consumption and Portfolio Policies with Incomplete Markets and Short-Sale Constraints: The Infinite Dimensional Case," Research Program in Finance Working Papers RPF-191, University of California at Berkeley.
- Hua He and Neil D. Pearson., 1989. "Consumption and Portfolio Policies with Incomplete Markets and Short-Sale Constraints: The Finite Dimensional Case," Research Program in Finance Working Papers RPF-189, University of California at Berkeley.
- L.C.G. Rogers, 2001. "The relaxed investor and parameter uncertainty," Finance and Stochastics, Springer, vol. 5(2), pages 131-154.
- Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Itzhak Gilboa & David Schmeidler, 1989. "Maxmin Expected Utility with Non-Unique Prior," Post-Print hal-00753237, HAL.
- Elyès Jouini & Clotilde Napp, 2004. "Convergence of utility functions and convergence of optimal strategies," Finance and Stochastics, Springer, vol. 8(1), pages 133-144, January.
- Clotilde Napp & Elyès Jouini, 2004. "Convergence of utility functions and convergence of optimal strategies," Post-Print halshs-00151579, HAL.
- Trojani, Fabio & Vanini, Paolo, 2002. "A note on robustness in Merton's model of intertemporal consumption and portfolio choice," Journal of Economic Dynamics and Control, Elsevier, vol. 26(3), pages 423-435, March.
- Nicole El Karoui & Monique Jeanblanc-Picquè & Steven E. Shreve, 1998. "Robustness of the Black and Scholes Formula," Mathematical Finance, Wiley Blackwell, vol. 8(2), pages 93-126.
- Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
- Freddy Delbaen & Walter Schachermayer, 1998. "A Simple Counterexample to Several Problems in the Theory of Asset Pricing," Mathematical Finance, Wiley Blackwell, vol. 8(1), pages 1-11.
- repec:dau:papers:123456789/355 is not listed on IDEAS Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:spapps:v:117:y:2007:i:11:p:1642-1662. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.