Malliavin calculus method for asymptotic expansion of dual control problems

DOI10.1137/120892441MaRDI QIDQ2873153zbMATH OpenOpenAlexFDO

Authors Michael Monoyios

Publication date 23 January 2014

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1209.6497

zbMATH Keywords

asymptotic expansionMalliavin calculusrelative entropystochastic controlindifference pricing

Mathematics Subject Classification ID

Stochastic calculus of variations and the Malliavin calculus (60H07) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: We develop a technique based on Malliavin-Bismut calculus ideas, for asymptotic expansion of dual control problems arising in connection with exponential indifference valuation of claims, and with minimisation of relative entropy, in incomplete markets. The problems involve optimisation of a functional of Brownian paths on Wiener space, with the paths perturbed by a drift involving the control. In addition there is a penalty term in which the control features quadratically. The drift perturbation is interpreted as a measure change using the Girsanov theorem, leading to a form of the integration by parts formula in which a directional derivative on Wiener space is computed. This allows for asymptotic analysis of the control problem. Applications to incomplete It^o process markets are given, in which indifference prices are approximated in the low risk aversion limit. We also give an application to identifying the minimal entropy martingale measure as a perturbation to the minimal martingale measure in stochastic volatility models.

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Cited in

(9)

• Approximate indifference pricing in exponential Lévy models
• Explicit solution of relative entropy weighted control
• An expansion in the model space in the context of utility maximization
• Asymptotic analysis of the expected utility maximization problem with respect to perturbations of the numéraire
• Utility indifference valuation for non-smooth payoffs with an application to power derivatives
• Fréchet differentiable drift dependence of Perron-Frobenius and Koopman operators for non-deterministic dynamics
• Sensitivity analysis for expected utility maximization in incomplete Brownian market models
• Quadratic expansions in optimal investment with respect to perturbations of the semimartingale model
• A multidimensional exponential utility indifference pricing model with applications to counterparty risk

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