Non-concave expected utility optimization with uncertain time horizon
From MaRDI portal
Publication:6133682
DOI10.1007/S00245-023-10037-XarXiv2005.13831OpenAlexW3197281220MaRDI QIDQ6133682FDOQ6133682
Author name not available (Why is that?)
Publication date: 21 August 2023
Published in: Applied Mathematics and Optimization (Search for Journal in Brave)
Abstract: We consider an expected utility maximization problem where the utility function is not necessarily concave and the time horizon is uncertain. We establish a necessary and sufficient condition for the optimality for general non-concave utility function in a complete financial market. We show that the general concavification approach of the utility function to deal with non-concavity, while being still applicable when the time horizon is a stopping time with respect to the financial market filtration, leads to sub-optimality when the time horizon is independent of the financial risk, and hence can not be directly applied. For the latter case, we suggest a recursive procedure which is based on the dynamic programming principle. We illustrate our findings by carrying out a multi-period numerical analysis for optimal investment problem under a convex option compensation scheme with random time horizon. We observe that the distribution of the non-concave portfolio in both certain and uncertain random time horizon is right-skewed with a long right tail, indicating that the investor expects frequent small losses and a few large gains from the investment. While the (certain) average time horizon portfolio at a premature stopping date is unimodal, the random time horizon portfolio is multimodal distributed which provides the investor a certain flexibility of switching between the local maximizers, depending on the market performance. The multimodal structure with multiple peaks of different heights can be explained by the concavification procedure, whereas the distribution of the time horizon has significant impact on the amplitude between the modes.
Full work available at URL: https://arxiv.org/abs/2005.13831
Cites Work
- Title not available (Why is that?)
- Optimum consumption and portfolio rules in a continuous-time model
- Optimal investment decisions when time-horizon is uncertain
- Stochastic control under progressive enlargement of filtrations and applications to multiple defaults risk management
- Stochastic finance. An introduction in discrete time.
- Martingale and Duality Methods for Utility Maximization in an Incomplete Market
- A variational problem arising in economics
- Optimal portfolio delegation when parties have different coefficients of risk aversion
- Portfolio optimization under convex incentive schemes
- Utility maximization with a given pricing measure when the utility is not necessarily concave
- Optimal financial investments for non-concave utility functions
- Wealth-path dependent utility maximization in incomplete markets
- Dynamic asset pricing theory with uncertain time-horizon
- Entrepreneurial Decisions on Effort and Project with a Nonconcave Objective Function
- Smooth Value Functions for a Class of Nonsmooth Utility Maximization Problems
- Constrained non-concave utility maximization: an application to life insurance contracts with guarantees
- Utility-Deviation-Risk Portfolio Selection
- Enlargement of Filtration with Finance in View
- Nonconcave Optimal Investment with Value-at-Risk Constraint: An Application to Life Insurance Contracts
- Utility Maximization Under Trading Constraints with Discontinuous Utility
- Non-concave expected utility optimization with uncertain time horizon
Cited In (4)
- Title not available (Why is that?)
- On the equivalence between value-at-risk- and expected shortfall-based risk measures in non-concave optimization
- Non-concave expected utility optimization with uncertain time horizon
- The role of health in consumption and portfolio decision-making: insights from state-dependent models
This page was built for publication: Non-concave expected utility optimization with uncertain time horizon
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q6133682)
