BSDEs in utility maximization with BMO market price of risk

DOI10.1016/J.SPA.2012.03.007MaRDI QIDQ429302zbMATH OpenOpenAlexFDO

Authors Christoph Frei, Markus Mocha, Nicholas Westray

Publication date 19 June 2012

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1107.0183

zbMATH Keywords

quadratic BSDEsBMO market price of riskdynamic exponential momentspower utility maximization

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Financial applications of other theories (91G80)

Abstract: This article studies quadratic semimartingale BSDEs arising in power utility maximization when the market price of risk is of BMO type. In a Brownian setting we provide a necessary and sufficient condition for the existence of a solution but show that uniqueness fails to hold in the sense that there exists a continuum of distinct square-integrable solutions. This feature occurs since, contrary to the classical Ito representation theorem, a representation of random variables in terms of stochastic exponentials is not unique. We study in detail when the BSDE has a bounded solution and derive a new dynamic exponential moments condition which is shown to be the minimal sufficient condition in a general filtration. The main results are complemented by several interesting examples which illustrate their sharpness as well as important properties of the utility maximization BSDE.

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Cited in

(4)

• A BSDE arising in an exponential utility maximization problem in a pure jump market model
• A system of quadratic BSDEs arising in a price impact model
• Robust utility maximization in nondominated models with 2BSDE: the uncertain volatility model
• New proofs of some results on bounded mean oscillation martingales using backward stochastic differential equations

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