English

A Variational Analysis Approach to Solving the Merton Problem

Portfolio Management 2020-03-20 v1 Mathematical Finance

Abstract

We address the Merton problem of maximizing the expected utility of terminal wealth using techniques from variational analysis. Under a general continuous semimartingale market model with stochastic parameters, we obtain a characterization of the optimal portfolio for general utility functions in terms of a forward-backward stochastic differential equation (FBSDE) and derive solutions for a number of well-known utility functions. Our results complement a previous studies conducted on optimal strategies in markets driven by Brownian noise with random drift and volatility parameters.

Keywords

Cite

@article{arxiv.2003.08450,
  title  = {A Variational Analysis Approach to Solving the Merton Problem},
  author = {Ali Al-Aradi and Sebastian Jaimungal},
  journal= {arXiv preprint arXiv:2003.08450},
  year   = {2020}
}
R2 v1 2026-06-23T14:19:16.781Z