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CRRA utility maximization under risk constraints


Moreno, Santiago; Reveillac, Anthony; Pirvu, Traian (2013). CRRA utility maximization under risk constraints. Communications on Stochastic Analysis, 7(2):203-225.

Abstract

The problem of optimal investment with CRRA (constant, relative risk aversion) preferences, subject to dynamic risk constraints on trading strategies, is the main focus of this paper. Several works in the literature, which deal either with optimal trading under static risk constraints or with VaR{based dynamic risk constraints, are extended. The market model considered is continuous in time and incomplete, and the prices of financial assets are modeled by It^o processes. The dynamic risk constraints, which are time and state dependent, are generated by a general class of risk measures. Optimal trading strategies are characterized by a quadratic BSDE. Within the class of time consistent distortion risk measures, a three{fund separation result is established. Numerical results emphasize the effects of imposing risk constraints on trading.

Abstract

The problem of optimal investment with CRRA (constant, relative risk aversion) preferences, subject to dynamic risk constraints on trading strategies, is the main focus of this paper. Several works in the literature, which deal either with optimal trading under static risk constraints or with VaR{based dynamic risk constraints, are extended. The market model considered is continuous in time and incomplete, and the prices of financial assets are modeled by It^o processes. The dynamic risk constraints, which are time and state dependent, are generated by a general class of risk measures. Optimal trading strategies are characterized by a quadratic BSDE. Within the class of time consistent distortion risk measures, a three{fund separation result is established. Numerical results emphasize the effects of imposing risk constraints on trading.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2013
Deposited On:04 Mar 2015 16:10
Last Modified:08 Dec 2017 11:17
Publisher:Serials Publications
ISSN:0973-9599
Free access at:Official URL. An embargo period may apply.
Official URL:https://www.math.lsu.edu/cosa/7-2-03%5B379%5D.pdf
Other Identification Number:merlin-id:10284

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