Stochastic maximum principle under probability distortion

Qizhu Liang and Jie Xiong

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Abstract: Within the framework of the cumulative prospective theory of Kahneman and Tversky, this paper considers a continuous-time behavioral portfolio selection problem whose model includes both running and terminal terms in the objective functional. Despite the existence of S-shaped utility functions and probability distortions, a necessary condition for optimality is derived. The results are applied to various examples.

Date: 2017-10, Revised 2018-08
New Economics Papers: this item is included in nep-upt
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