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Stability of utility maximization in nonequivalent markets

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  • Kim Weston

    () (Carnegie Mellon University)

Abstract

Abstract Stability of the utility maximization problem with random endowment and indifference prices is studied for a sequence of financial markets in an incomplete Brownian setting. Our novelty lies in the nonequivalence of markets, in which the volatility of asset prices (as well as the drift) varies. Degeneracies arise from the presence of nonequivalence. In the positive real line utility framework, a counterexample is presented showing that the expected utility maximization problem can be unstable. A positive stability result is proved for utility functions on the entire real line.

Suggested Citation

  • Kim Weston, 2016. "Stability of utility maximization in nonequivalent markets," Finance and Stochastics, Springer, vol. 20(2), pages 511-541, April.
  • Handle: RePEc:spr:finsto:v:20:y:2016:i:2:d:10.1007_s00780-016-0289-z
    DOI: 10.1007/s00780-016-0289-z
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    References listed on IDEAS

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    Cited by:

    1. Sigrid Källblad, 2017. "Risk- and ambiguity-averse portfolio optimization with quasiconcave utility functionals," Finance and Stochastics, Springer, vol. 21(2), pages 397-425, April.
    2. Lingqi Gu & Yiqing Lin & Junjian Yang, 2017. "Utility maximization problem under transaction costs: optimal dual processes and stability," Papers 1710.04363, arXiv.org.

    More about this item

    Keywords

    Expected utility theory; Incompleteness; Random endowment; Market stability; Nonequivalent markets;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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