Market viability and martingale measures under partial information

DOI10.1007/S11009-014-9397-4MaRDI QIDQ2340293zbMATH OpenOpenAlexFDO

Authors Claudio Fontana, Agnès Sulem, B. Øksendal

Publication date 16 April 2015

Published in Methodology and Computing in Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1302.4254

zbMATH Keywords

backward stochastic differential equationfinancial market modeljump diffusionmartingale deflatormartingale measuresmaximum principleoptimal portfoliopartial informationutility maximizationviability

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Processes with independent increments; Lévy processes (60G51) Random measures (60G57) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Diffusion processes (60J60) Stochastic models in economics (91B70) Financial applications of other theories (91G80) Optimal stochastic control (93E20) Measures of information, entropy (94A17)

Abstract: We consider a financial market model with a single risky asset whose price process evolves according to a general jump-diffusion with locally bounded coefficients and where market participants have only access to a partial information flow. For any utility function, we prove that the partial information financial market is locally viable, in the sense that the optimal portfolio problem has a solution up to a stopping time, if and only if the (normalised) marginal utility of the terminal wealth generates a partial information equivalent martingale measure (PIEMM). This equivalence result is proved in a constructive way by relying on maximum principles for stochastic control problems under partial information. We then characterize a global notion of market viability in terms of partial information local martingale deflators (PILMDs). We illustrate our results by means of a simple example.

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Cited in

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