Multiplicative Approximation of Wealth Processes Involving No-Short-Sale Strategies

Constantinos Kardaras and Eckhard Platen ()

No 240, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: A financial market model with general semimartingale asset-price processes and where agents can only trade using no-short-sale strategies is considered. We show that wealth processes using continuous trading can be approximated very closely by wealth processes using simple combinations of buy-and-hold trading. This approximation is based on controlling the proportions of wealth invested in the assets. As an application, the utility maximization problem is considered and it is shown that optimal utilities and wealth processes resulting from continuous trading can be approximated arbitrarily well by the use of simple combinations of buy-and-hold strategies.

Keywords: Semimartingales; buy-and-hold strategies; stochastic integral; Unbounded Profit with Bounded Risk; utility maximization (search for similar items in EconPapers)
Date: 2008-12-01

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