A utility maximization approach to hedging in incomplete markets

Jan Kallsen

Mathematical Methods of Operations Research, 1999, vol. 50, issue 2, 338 pages

Abstract: In this paper we introduce the notion of portfolio optimization by maximizing expected local utility. This concept is related to maximization of expected utility of consumption but, contrary to this common approach, the discounted financial gains are consumed immediately. In a general continuous-time market optimal portfolios are obtained by pointwise solution of equations involving the semimartingale characteristics of the underlying securities price process. The new concept is applied to hedging problems in frictionless, incomplete markets. Copyright Springer-Verlag Berlin Heidelberg 1999

Keywords: Key words: Portfolio optimization; hedging; incomplete markets; local utility (search for similar items in EconPapers)
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:spr:mathme:v:50:y:1999:i:2:p:321-338

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DOI: 10.1007/s001860050100

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