Representation of Homothetic Forward Performance Processes in Stochastic Factor Models Via Ergodic and Infinite Horizon BSDE

34 Pages Posted: 17 Nov 2016

See all articles by Gechun Liang

Gechun Liang

University of Warwick - Department of Statistics

Thaleia Zariphopoulou

University of Texas at Austin (Mathematics and IROM)

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

Liang, Gechun and Zariphopoulou, Thaleia, Representation of Homothetic Forward Performance Processes in Stochastic Factor Models Via Ergodic and Infinite Horizon BSDE (November 15, 2016). Available at SSRN: https://ssrn.com/abstract=2870445 or http://dx.doi.org/10.2139/ssrn.2870445

Gechun Liang

University of Warwick - Department of Statistics ( email )

Coventry CV4 7AL
United Kingdom

Thaleia Zariphopoulou (Contact Author)

University of Texas at Austin (Mathematics and IROM) ( email )

CBA 5.202
Austin, TX 78712
United States

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