Wealth optimization in an incomplete market driven by a jump-diffusion process
This paper studies the wealth optimization problem of a risk-averse investor in a market with one bond and one risky asset, whose price dynamic is driven by a Brownian motion and several independent Poisson processes. It proves the existence of an optimal portfolio and characterizes the portfolio. The optimal strategy is associated with a unique equivalent martingale measure identifiable with M. H. A. Davis' (1997) marginal-rate-of-substitution approach to pricing options in incomplete markets. In the presence of jumps in the risky asset, the investor's welfare or value function is shown to reduce. Some examples are given.
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