OPTIMAL INVESTMENT WITH AN UNBOUNDED RANDOM ENDOWMENT AND UTILITY‐BASED PRICING
By Mark P. Owen, Gordan Zitkovic. 2007
79 citations recorded by the source corpus.
This paper studies the problem of maximizing the expected utility of terminal wealth for a financial agent with an unbounded random endowment, and with a utility function which supports both positive and negative wealth. We prove the existence of an optimal trading strategy within a class of permissible strategies—those strategies whose wealth process is a super‐martingale under all pricing measures with finite relative entropy. We give necessary and sufficient conditions for the absence of utility‐based arbitrage, and for the existence of a solution to the primal problem. We consider two utility‐based methods which can be used to price contingent claims. Firstly we investigate marginal utility‐based price processes (MUBPP's). We show that such processes can be characterized as local martingales under the normalized optimal dual measure for the utility maximizing investor. Finally, we present some new results on utility indifference prices, including continuity properties and volume asymptotics for the case of a general utility function, unbounded endowment and unbounded contingent claims.
Subfields: Economics and Econometrics, Finance, Management Science and Operations Research
View Paper: https://www.semanticscholar.org/paper/36703055cf6ee94af8994228c74956cdf45ef94b
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In Economics and Econometrics
In Finance
In Management Science and Operations Research
Citations in the corpus
- A dual characterization of self-generation and exponential forward performances (2008, background): “An axiomatic treatment of a class of forward performances by Zariphopoulou and Žitković in [38] is based on an implenetation of this idea in the context of the risk-measure theory, but without a fixed finite investment horizon.”