An expansion in the model space in the context of utility maximization

Kasper Larsen (), Oleksii Mostovyi () and Gordan Žitković ()
Additional contact information
Kasper Larsen: Rutgers University
Oleksii Mostovyi: University of Connecticut
Gordan Žitković: University of Texas at Austin

Finance and Stochastics, 2018, vol. 22, issue 2, No 3, 297-326

Abstract: Abstract In the framework of an incomplete financial market where the stock price dynamics are modeled by a continuous semimartingale (not necessarily Markovian), an explicit second-order expansion formula for the power investor’s value function—seen as a function of the underlying market price of risk process—is provided. This allows us to provide first-order approximations of the optimal primal and dual controls. Two specific calibrated numerical examples illustrating the accuracy of the method are also given.

Keywords: Continuous semimartingales; Second-order expansion; Incomplete markets; Power utility; Convex duality; Optimal investment; 91G10; 91G80; 60K35 (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s00780-017-0353-3

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