Optimal portfolios for logarithmic utility. (Q1877521): Difference between revisions

The paper derives the solution to the finite horizon consumption and portfolio choice problem under a general price process \(S\) and logarithmic period utility of consumption (a special, i.e. degenerate consumption regime covers the case of logarithmic utility of terminal wealth). The solution is given in terms of the characteristics of the discounted price semimartingale \(\widehat {S}\) (in the terminology of J. Jacod and A. Shiryaev). The optimal consumption and trading strategy are characterized by an \(\widehat {S}\)-integrable vector process \(H\) satisfying an integral equation with characteristics-dependent coefficients, and the discounted wealth process \(V\). Specifically, portfolio holdings at time \(t\) are given by the components of vector \(H_{t}V_{t}\). For the case of Itô price processes, the result coincides with the known (e.g. Merton's) formulae for optimal portfolio shares under logarithmic utility. The result of the paper is applicable to exponential Lévy price processes, among others.