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Mutual Fund Theorem for continuous time markets with random coefficients

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  • Nikolai Dokuchaev

Abstract

The optimal investment problem is studied for a continuous time incomplete market model. It is assumed that the risk-free rate, the appreciation rates, and the volatility of the stocks are all random; they are independent from the driving Brownian motion, and they are currently observable. It is shown that some weakened version of Mutual Fund Theorem holds for this market for general class of utilities. It is shown that the supremum of expected utilities can be achieved on a sequence of strategies with a certain distribution of risky assets that does not depend on risk preferences described by different utilities. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Nikolai Dokuchaev, 2014. "Mutual Fund Theorem for continuous time markets with random coefficients," Theory and Decision, Springer, vol. 76(2), pages 179-199, February.
    • Handle: RePEc:kap:theord:v:76:y:2014:i:2:p:179-199
    DOI: 10.1007/s11238-013-9368-1
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    References listed on IDEAS

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    1. N. Dokuchaev & U. Haussmann, 2001. "Optimal portfolio selection and compression in an incomplete market," Quantitative Finance, Taylor & Francis Journals, vol. 1(3), pages 336-345, March.
    2. Andrew E. B. Lim, 2004. "Quadratic Hedging and Mean-Variance Portfolio Selection with Random Parameters in an Incomplete Market," Mathematics of Operations Research, INFORMS, vol. 29(1), pages 132-161, February.
    3. M. J. Brennan, 1998. "The Role of Learning in Dynamic Portfolio Decisions," Review of Finance, European Finance Association, vol. 1(3), pages 295-306.
    4. Martin Kulldorff & Ajay Khanna, 1999. "A generalization of the mutual fund theorem," Finance and Stochastics, Springer, vol. 3(2), pages 167-185.
    5. David Feldman, 2007. "Incomplete information equilibria: Separation theorems and other myths," Annals of Operations Research, Springer, vol. 151(1), pages 119-149, April.
    6. Walter Schachermayer & Mihai Sîrbu & Erik Taflin, 2009. "In which financial markets do mutual fund theorems hold true?," Finance and Stochastics, Springer, vol. 13(1), pages 49-77, January.
    7. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
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    Cited by:

    1. Toru Igarashi, 2019. "An Analytic Market Condition for Mutual Fund Separation: Demand for the Non-Sharpe Ratio Maximizing Portfolio," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 26(2), pages 169-185, June.

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