BSDEs in Utility Maximization with BMO Market Price of Risk
This article studies quadratic semimartingale BSDEs arising in power utility maximization when the market price of risk is of BMO type. In a Brownian setting we provide a necessary and sufficient condition for the existence of a solution but show that uniqueness fails to hold in the sense that there exists a continuum of distinct square-integrable solutions. This feature occurs since, contrary to the classical Ito representation theorem, a representation of random variables in terms of stochastic exponentials is not unique. We study in detail when the BSDE has a bounded solution and derive a new dynamic exponential moments condition which is shown to be the minimal sufficient condition in a general filtration. The main results are complemented by several interesting examples which illustrate their sharpness as well as important properties of the utility maximization BSDE.
|Date of creation:||Jul 2011|
|Date of revision:||Feb 2012|
|Publication status:||Published in Stochastic Process. Appl., 122 (6): 2486 - 2519, 2012|
|Contact details of provider:|| Web page: http://arxiv.org/|
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.:
- Marie-Amélie Morlais, 2009. "Quadratic BSDEs driven by a continuous martingale and applications to the utility maximization problem," Finance and Stochastics, Springer, vol. 13(1), pages 121-150, January.
- Michael Mania & Martin Schweizer, 2005. "Dynamic exponential utility indifference valuation," Papers math/0508489, arXiv.org.
- Richard Rouge & Nicole El Karoui, 2000. "Pricing Via Utility Maximization and Entropy," Mathematical Finance, Wiley Blackwell, vol. 10(2), pages 259-276.
- Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
- Ying Hu & Peter Imkeller & Matthias Muller, 2005. "Utility maximization in incomplete markets," Papers math/0508448, arXiv.org.
- Marcel Nutz, 2010. "Risk Aversion Asymptotics for Power Utility Maximization," Papers 1003.3582, arXiv.org.
- Kasper Larsen & Gordan Zitkovic, 2007. "Stability of utility-maximization in incomplete markets," Papers 0706.0474, arXiv.org.
- Marcel Nutz, 2009. "The Opportunity Process for Optimal Consumption and Investment with Power Utility," Papers 0912.1879, arXiv.org, revised Jun 2010.
- Larsen, Kasper & Zitkovic, Gordan, 2007. "Stability of utility-maximization in incomplete markets," Stochastic Processes and their Applications, Elsevier, vol. 117(11), pages 1642-1662, November.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1107.0183. 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: (arXiv administrators)
If references are entirely missing, you can add them using this form.