Duality for optimal consumption under no unbounded profit with bounded risk

DOI10.1214/21-AAP1767zbMATH Open1499.91129arXiv2006.04687OpenAlexW3211844797MaRDI QIDQ2094575FDOQ2094575

Authors: Michael Monoyios 

Publication date: 31 October 2022

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: We give a definitive treatment of duality for optimal consumption over the infinite horizon, in a semimartingale incomplete market satisfying no unbounded profit with bounded risk (NUPBR). Rather than base the dual domain on (local) martingale deflators, we use a class of supermartingale deflators such that deflated wealth plus cumulative deflated consumption is a supermartingale for all admissible consumption plans. This yields a strong duality, because the enlarged dual domain of processes dominated by deflators is naturally closed, without invoking its closure. In this way we automatically reach the bipolar of the set of deflators. We complete this picture by proving that the set of processes dominated by local martingale deflators is dense in our dual domain, confirming that we have identified the natural dual space. In addition to the optimal consumption and deflator, we characterise the optimal wealth process. At the optimum, deflated wealth is a supermartingale and a potential, while deflated wealth plus cumulative deflated consumption is a uniformly integrable martingale. This is the natural generalisation of the corresponding feature in the terminal wealth problem, where deflated wealth at the optimum is a uniformly integrable martingale. We use no constructions involving equivalent local martingale measures. This is natural, given that such measures typically do not exist over the infinite horizon and that we are working under NUPBR, which does not require their existence. The structure of the duality proof reveals an interesting feature compared with the terminal wealth problem. There, the dual domain is $L^1$-bounded, but here the primal domain has this property, and hence many steps in the duality proof show a marked reversal of roles for the primal and dual domains, compared with the proofs of Kramkov and Schachermayer.

Full work available at URL: https://arxiv.org/abs/2006.04687

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zbMATH Keywords

dualitysupermartingale deflatorutility from consumption

Mathematics Subject Classification ID

Financial markets (91G15) Generalizations of martingales (60G48)

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Cited In (5)

• Risk-neutral firms can extract unbounded profits from consumers with prospect theory preferences
• A note on the condition of no unbounded profit with bounded risk
• Duality for optimal consumption with randomly terminating income
• Optimal investment with intermediate consumption under no unbounded profit with bounded risk
• A filtered version of the bipolar theorem of Brannath and Schachermayer

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