Extremal Behavior of Long-Term Investors with Power Utility

Nicole B\"auerle and Stefanie Grether

Papers from arXiv.org

Abstract: We consider a Bayesian financial market with one bond and one stock where the aim is to maximize the expected power utility from terminal wealth. The solution of this problem is known, however there are some conjectures in the literature about the long-term behavior of the optimal strategy. In this paper we prove now that for positive coefficient in the power utility the long-term investor is very optimistic and behaves as if the best drift has been realized. In case the coefficient in the power utility is negative the long-term investor is very pessimistic and behaves as if the worst drift has been realized.

Date: 2017-03, Revised 2017-06
New Economics Papers: this item is included in nep-upt
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Published in International Journal of Theoretical and Applied Finance 20 (5), 2017

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1703.04423

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