OPTIMAL INVESTMENT WITH AN UNBOUNDED RANDOM ENDOWMENT AND UTILITY‐BASED PRICING

DOI10.1111/J.1467-9965.2008.00360.XzbMATH Open1155.91393arXiv0706.0478OpenAlexW2124153301MaRDI QIDQ3608738FDOQ3608738

Authors: Mark P. Owen, Gordan Žitković 

Publication date: 6 March 2009

Published in: Mathematical Finance (Search for Journal in Brave)

Abstract: This paper studies the problem of maximizing the expected utility of terminal wealth for a financial agent with an unbounded random endowment, and with a utility function which supports both positive and negative wealth. We prove the existence of an optimal trading strategy within a class of permissible strategies -- those strategies whose wealth process is a supermartingale under all pricing measures with finite relative entropy. We give necessary and sufficient conditions for the absence of utility-based arbitrage, and for the existence of a solution to the primal problem. We consider two utility-based methods which can be used to price contingent claims. Firstly we investigate marginal utility-based price processes (MUBPP's). We show that such processes can be characterized as local martingales under the normalized optimal dual measure for the utility maximizing investor. Finally, we present some new results on utility indifference prices, including continuity properties and volume asymptotics for the case of a general utility function, unbounded endowment and unbounded contingent claims.

Full work available at URL: https://arxiv.org/abs/0706.0478

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zbMATH Keywords

utility maximizationincomplete marketsrandom endowmentutility indifference pricesmarginal utility-based price processes

Mathematics Subject Classification ID

Portfolio theory (91G10)

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Cited In (35)

• A note on utility-based pricing
• Forward-backward systems for expected utility maximization
• On dynamic programming equations for utility indifference pricing under delta constraints
• Optimal investment and contingent claim valuation in illiquid markets
• Utility maximization with proportional transaction costs under model uncertainty
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