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 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.
References listed on IDEAS
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- 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.
- 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.
- 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. Full references (including those not matched with items on IDEAS)
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