Representation of Homothetic Forward Performance Processes in Stochastic Factor Models via Ergodic and Infinite Horizon BSDE
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Abstract: In an incomplete market, with incompleteness stemming from stochastic factors imperfectly correlated with the underlying stocks, we derive representations of homothetic (power, exponential and logarithmic) forward performance processes in factor-form using ergodic BSDE. We also develop a connection between the forward processes and infinite horizon BSDE, and, moreover, with risk-sensitive optimization. In addition, we develop a connection, for large time horizons, with a family of classical homothetic value function processes with random endowments.
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Cited in
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