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}
}