Utility maximization under increasing risk aversion in one-period models (Q2488511)

Two financial securities are considered that can be traded at times \(0\) and \(T>0\). It is assumed that the price of the first security is always positive and the authors use it as numéraire. The time \(0\) price of the second security is a positive constant \(S_0\) while at time \(T\) it is \(S_t=S_0+\Delta S\) for a random variable \(\Delta S\). The convergence of the utility maximizing strategies under the risk aversion in the one-period model is studied. This is equivalent to studying the behaviour of the optimal terminal wealth corresponding to the initial value and payoff \(B\) of the contingent claims under increasing risk aversion. An example of the one-period model with bounded \(\Delta S\) and \(B\) such that the optimal strategies corresponding to \(B\) and exponential utility stay bounded but do not converge when the absolute risk aversion tends to infinity. The authors study the behaviour of utility maximizing strategies and terminal wealth under increasing risk aversion in general one-period models. This naturally leads to the concept of the balanced strategy which plays a crucial role.