Sensitivity analysis for expected utility maximization in incomplete Brownian market models

DOI10.1007/S11579-017-0209-9zbMATH Open1397.91545arXiv1504.02734OpenAlexW2963134842MaRDI QIDQ1648899FDOQ1648899

Authors: Y. Aharonov 

Publication date: 5 July 2018

Published in: Mathematics and Financial Economics (Search for Journal in Brave)

Abstract: We examine the issue of sensitivity with respect to model parameters for the problem of utility maximization from final wealth in an incomplete Samuelson model and mainly, but not exclusively, for utility functions of positive power-type. The method consists in moving the parameters through change of measure, which we call a weak perturbation, decoupling the usual wealth equation from the varying parameters. By rewriting the maximization problem in terms of a convex-analytical support function of a weakly-compact set, crucially leveraging on the work of Backhoff and Fontbona (SIFIN 2016), the previous formulation let us prove the Hadamard directional differentiability of the value function w.r.t. the drift and interest rate parameters, as well as for volatility matrices under a stability condition on their Kernel, and derive explicit expressions for the directional derivatives. We contrast our proposed weak perturbations against what we call strong perturbations, where the wealth equation is directly influenced by the changing parameters. Contrary to conventional wisdom, we find that both points of view generally yield different sensitivities unless e.g. if initial parameters and their perturbations are deterministic.

Full work available at URL: https://arxiv.org/abs/1504.02734

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zbMATH Keywords

sensitivity analysisutility maximizationweak formulationfirst-order sensitivity

Mathematics Subject Classification ID

Portfolio theory (91G10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)

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Cited In (8)

• Utility maximization problem with transaction costs: optimal dual processes and stability
• Continuity of utility maximization under weak convergence
• Robust utility maximization without model compactness
• Sensitivity analysis of the utility maximisation problem with respect to model perturbations
• SENSITIVITY ANALYSIS AND DENSITY ESTIMATION FOR THE HOBSON-ROGERS STOCHASTIC VOLATILITY MODEL
• Stability of the Epstein-Zin problem
• Convergence of optimal expected utility for a sequence of binomial models
• Quadratic expansions in optimal investment with respect to perturbations of the semimartingale model

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