Optimal investment for all time horizons and Martin boundary of space-time diffusions

Sergey Nadtochiy and Michael Tehranchi

Papers from arXiv.org

Abstract: This paper is concerned with the axiomatic foundation and explicit construction of a general class of optimality criteria that can be used for investment problems with multiple time horizons, or when the time horizon is not known in advance. Both the investment criterion and the optimal strategy are characterized by the Hamilton-Jacobi-Bellman equation on a semi-infinite time interval. In the case when this equation can be linearized, the problem reduces to a time-reversed parabolic equation, which cannot be analyzed via the standard methods of partial differential equations. Under the additional uniform ellipticity condition, we make use of the available description of all minimal solutions to such equations, along with some basic facts from potential theory and convex analysis, to obtain an explicit integral representation of all positive solutions. These results allow us to construct a large family of the aforementioned optimality criteria, including some closed form examples in relevant financial models.

Date: 2013-08, Revised 2014-01
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1308.2254

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