Well Posedness of Utility Maximization Problems Under Partial Information in a Market with Gaussian Drift

Abdelali Gabih, Hakam Kondakji and Ralf Wunderlich

Papers from arXiv.org

Abstract: This paper investigates well posedness of utility maximization problems for financial markets where stock returns depend on a hidden Gaussian mean reverting drift process. Since that process is potentially unbounded, well posedness cannot be guaranteed for utility functions which are not bounded from above. For power utility with relative risk aversion smaller than that of log-utility this leads to restrictions on the choice of model parameters such as the investment horizon and parameters controlling the variance of the asset price and drift processes. We derive sufficient conditions to the model parameters leading to bounded maximum expected utility of terminal wealth for models with full and partial information.

Date: 2022-05, Revised 2024-07
New Economics Papers: this item is included in nep-upt
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