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Representation of homothetic forward performance processes in stochastic factor models via ergodic and infinite horizon BSDE

Gechun Liang () and Thaleia Zariphopoulou

Papers from arXiv.org

Abstract: In an incomplete market, with incompleteness stemming from stochastic factors imperfectly correlated with the underlying stocks, we derive representations of homothetic (power, exponential and logarithmic) forward performance processes in factor-form using ergodic BSDE. We also develop a connection between the forward processes and infinite horizon BSDE, and, moreover, with risk-sensitive optimization. In addition, we develop a connection, for large time horizons, with a family of classical homothetic value function processes with random endowments.

Date: 2015-11, Revised 2016-11
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