Infinite horizon utility maximisation from inter-temporal wealth

Michael Monoyios

Papers from arXiv.org

Abstract: We develop a duality theory for the problem of maximising expected lifetime utility from inter-temporal wealth over an infinite horizon, under the minimal no-arbitrage assumption of No Unbounded Profit with Bounded Risk (NUPBR). We use only deflators, with no arguments involving equivalent martingale measures, so do not require the stronger condition of No Free Lunch with Vanishing Risk (NFLVR). Our formalism also works without alteration for the finite horizon version of the problem. As well as extending work of Bouchard and Pham to any horizon and to a weaker no-arbitrage setting, we obtain a stronger duality statement, because we do not assume by definition that the dual domain is the polar set of the primal space. Instead, we adopt a method akin to that used for inter-temporal consumption problems, developing a supermartingale property of the deflated wealth and its path that yields an infinite horizon budget constraint and serves to define the correct dual variables. The structure of our dual space allows us to show that it is convex, without forcing this property by assumption. We proceed to enlarge the primal and dual domains to confer solidity to them, and use supermartingale convergence results which exploit Fatou convergence, to establish that the enlarged dual domain is the bipolar of the original dual space. The resulting duality theorem shows that all the classical tenets of convex duality hold. Moreover, at the optimum, the deflated wealth process is a potential converging to zero. We work out examples, including a case with a stock whose market price of risk is a three-dimensional Bessel process, so satisfying NUPBR but not NFLVR.

Date: 2020-08, Revised 2020-10
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2009.00972 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2009.00972

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().