Recursive utility processes, dynamic risk measures and quadratic backward stochastic Volterra integral equations

DOI10.1007/S00245-019-09641-7MaRDI QIDQ2045114zbMATH OpenOpenAlexWikidataFDO

Authors Hanxiao Wang, Jingrui Sun, Jiongmin Yong

Publication date 11 August 2021

Published in Applied Mathematics and Optimization (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1810.10149

zbMATH Keywords

backward stochastic Volterra integral equationcomparison theoremequilibrium dynamic risk measureequilibrium recursive utility processquadratic generatortime-consistency

Mathematics Subject Classification ID

Stochastic calculus of variations and the Malliavin calculus (60H07) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Stochastic models in economics (91B70) Financial applications of other theories (91G80)

Abstract: For an $c{F}_T$-measurable payoff of a European type contingent claim, the recursive utility process/dynamic risk measure can be described by the adapted solution to a backward stochastic differential equation (BSDE). However, for an $c{F}_T$-measurable stochastic process (called a position process, not necessarily $dbF$-adapted), mimicking BSDE's approach will lead to a time-inconsistent recursive utility/dynamic risk measure. It is found that a more proper approach is to use the adapted solution to a backward stochastic Volterra integral equation (BSVIE). The corresponding notions are called equilibrium recursive utility and equilibrium dynamic risk measure, respectively. Motivated by this, the current paper is concerned with BSVIEs whose generators are allowed to have quadratic growth (in $Z(t,s)$). The existence and uniqueness for both the so-called adapted solutions and adapted M-solutions are established. A comparison theorem for adapted solutions to the so-called Type-I BSVIEs is established as well. As consequences of these results, some general continuous-time equilibrium dynamic risk measures and equilibrium recursive utility processes are constructed.

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Cited in

(27)

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