Representation of Homothetic Forward Performance Processes in Stochastic Factor Models Via Ergodic and Infinite Horizon BSDE
34 Pages Posted: 17 Nov 2016
Date Written: November 15, 2016
Abstract
In an incomplete market, with incompleteness stemming from stochas- tic factors imperfectly correlated with the underlying stocks, we derive representations of homothetic (power, exponential and logarithmic) for- ward performance processes in factor-form using ergodic BSDE. We also develop a connection between the forward processes and infinite horizon BSDE, and, moreover, with risk-sensitive optimization. In addition, we develop a connection, for large time horizons, with a family of classical homothetic value function processes with random endowments.
Keywords: portfolio choice, forward performance criteria, ergodic BSDE, risk-sensitive control
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation