Facelifting in Utility Maximization

Kasper Larsen, Mete Soner and Gordan Zitkovic
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Kasper Larsen: Carnegie Mellon University
Mete Soner: ETH Zurich and Swiss Finance Institute
Gordan Zitkovic: University of Texas

No 14-61, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We establish the existence and characterization of a primal and a dual facelift - discontinuity of the value function at the terminal time - for utility maximization in incomplete semimartingale-driven financial markets. Unlike in the lower- and upper-hedging problems, and somewhat unexpectedly, a facelift turns out to exist in utility-maximization despite strict convexity in the objective function. In addition to discussing our results in their natural, Markovian environment, we also use them to show that the dual optimizer cannot be found in the set of countably-additive (martingale) measures in a wide variety of situations.

Keywords: Boundary layer; convex analysis; convex duality; facelift; financial mathematics; incomplete markets; Markov processes; utility-maximization; unspanned endowment (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2014-10
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1461

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