A remark on smooth solutions to a stochastic control problem with a power terminal cost function and stochastic volatilities

DOI10.1007/S11579-014-0128-YzbMATH Open1303.49008OpenAlexW2155942270MaRDI QIDQ475326FDOQ475326

Authors Yalçin Aktar, Erik Taflin

Publication date 26 November 2014

Published in Mathematics and Financial Economics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1405.3566

zbMATH Keywords

optimal stochastic controlsemilinear parabolic equationssmooth solutionsstochastic volatilities

Mathematics Subject Classification ID

Semilinear parabolic equations (35K58) Existence of optimal solutions to problems involving randomness (49J55) Applications of stochastic analysis (to PDEs, etc.) (60H30) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: Incomplete financial markets are considered, defined by a multi-dimensional non-homogeneous diffusion process, being the direct sum of an It^{o} process (the price process), and another non-homogeneous diffusion process (the exogenous process, representing exogenous stochastic sources). The drift and the diffusion matrix of the price process are functions of the time, the price process itself and the exogenous process. In the context of such markets and for power utility functions, it is proved that the stochastic control problem consisting of optimizing the expected utility of the terminal wealth, has a classical solution (i.e. $C^{1,2}$). This result paves the way to a study of the optimal portfolio problem in incomplete forward variance stochastic volatility models, along the lines of Ref: Ekeland et al.

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Cited in

(3)

• On the multi-dimensional portfolio optimization with stochastic volatility
• An ergodic BSDE approach to forward entropic risk measures: representation and large-maturity behavior
• Risk-sensitive asset management and cascading defaults

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