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Risk Sensitive Investment Management with Affine Processes: a Viscosity Approach

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  • Mark Davis
  • Sebastien Lleo

Abstract

In this paper, we extend the jump-diffusion model proposed by Davis and Lleo to include jumps in asset prices as well as valuation factors. The criterion, following earlier work by Bielecki, Pliska, Nagai and others, is risk-sensitive optimization (equivalent to maximizing the expected growth rate subject to a constraint on variance.) In this setting, the Hamilton- Jacobi-Bellman equation is a partial integro-differential PDE. The main result of the paper is to show that the value function of the control problem is the unique viscosity solution of the Hamilton-Jacobi-Bellman equation.

Suggested Citation

  • Mark Davis & Sebastien Lleo, 2010. "Risk Sensitive Investment Management with Affine Processes: a Viscosity Approach," Papers 1003.2521, arXiv.org.
  • Handle: RePEc:arx:papers:1003.2521
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    File URL: http://arxiv.org/pdf/1003.2521
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    Cited by:

    1. Goutte St├ęphane & Ngoupeyou Armand, 2014. "Dual Optimization Problem on Defaultable Claims," Mathematical Economics Letters, De Gruyter, vol. 1(2-4), pages 1-8, July.
    2. Stephane Goutte & Armand Ngoupeyou, 2012. "Optimization problem and mean variance hedging on defaultable claims," Papers 1209.5953, arXiv.org.

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