ASSET-LIABILITY MANAGEMENT WITH EPSTEIN-ZIN UTILITY UNDER STOCHASTIC INTEREST RATE AND UNKNOWN MARKET PRICE OF RISK

Wilfried Kuissi-Kamdem ()
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Wilfried Kuissi-Kamdem: AIMS - African Institute for Mathematical Sciences, Department of Mathematics, University of Rwanda, Kigali 4285, Rwanda, Institute for Mathematics, University of Freiburg

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Abstract: This paper considers a stochastic control problem with Epstein-Zin recursive utility under partial information (unknown market price of risk), in which an investor is constrained to a liability at the end of the investment period. Introducing liabilities is the main novelty of the model and appears for the first time in the literature of recursive utilities. Such constraint leads to a coupled forward-backward stochastic differential equation (FBSDE), which wellposedness has not been addressed in the literature. We derive an explicit solution to the FBSDE, contrasting with the existence and uniqueness results with no explicit expression of the solutions typically found in most related literature. Moreover, under minimal additional assumptions, we obtain the Malliavin differentiability of the solution of the FBSDE. We solve the problem completely and find the expression of the controls and the value function. Finally, we determine the utility loss that investors suffer from ignoring the fact that they can learn about the market price of risk.

Keywords: Consumption-portfolio choice; Epstein-Zin utility with liability; Partial information; Forward-backward stochastic differential equations; Malliavin calculus (search for similar items in EconPapers)
Date: 2025-11-03
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