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Utility Maximization in Imperfected Markets

Author

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  • Long Nguyen-Thanh

    (Warsaw School of Economics)

Abstract

We analyze a problem of maximization of expected terminal wealth and consumption in markets with some ``imperfection'', such as constraints on the permitted portfolios, labor income, or/and nonlinearity of portfolio dynamics. By using general optional decomposition under constraints in multiplicative form, we develop a dual formulation. Then, under some conditions imposed on the model setting and the utility functions, we are able to prove an existence and uniqueness of an optimal solution to primal and to the corresponding dual problem by convex duality.

Suggested Citation

  • Long Nguyen-Thanh, 2003. "Utility Maximization in Imperfected Markets," Finance 0301007, EconWPA, revised 23 Mar 2003.
  • Handle: RePEc:wpa:wuwpfi:0301007
    Note: Type of Document - Tex/WordPerfect/Handwritten; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 41; figures: included/request from author/draw your own
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    Keywords

    Stochastic Optimization; Utility Optimization; Duality Theory; Convex and State Constraints; Optional Decomposition; Optimal Stopping;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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