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Horizon dependence of utility optimizers in incomplete models

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  • Kasper Larsen
  • Hang Yu

Abstract

This paper studies the utility maximization problem with changing time horizons in the incomplete Brownian setting. We first show that the primal value function and the optimal terminal wealth are continuous with respect to the time horizon T. Secondly, we exemplify that the expected utility stemming from applying the T-horizon optimizer on a shorter time horizon S>T may fail to converge to the T-horizon value as S↑T. Finally, we provide necessary and sufficient conditions preventing the existence of this phenomenon. Copyright Springer-Verlag 2012

Suggested Citation

  • Kasper Larsen & Hang Yu, 2012. "Horizon dependence of utility optimizers in incomplete models," Finance and Stochastics, Springer, vol. 16(4), pages 779-801, October.
    • Handle: RePEc:spr:finsto:v:16:y:2012:i:4:p:779-801
    DOI: 10.1007/s00780-012-0171-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Incompleteness; Brownian motion; Market price of risk process; Interest rate process; Expected utility theory; 91B28; 90C46; 60G44; G11; D81;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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