Optimality and State Pricing in Constrained Financial Markets with Recursive Utility Under Continuous and Discontinuous Information

40 Pages Posted: 12 Mar 2008

Abstract

We study marginal pricing and optimality conditions for an agent maximizing generalized recursive utility in a financial market with information generated by Brownian motion and marked point processes. The setting allows for convex trading constraints, non-tradable income, and non-linear wealth dynamics. We show that the FBSDE system of the general optimality conditions reduces to a single BSDE under translation or scale invariance assumptions, and we identify tractable applications based on quadratic BSDEs. An appendix relates the main optimality conditions to duality.

Suggested Citation

Schroder, Mark D. and Skiadas, Costis, Optimality and State Pricing in Constrained Financial Markets with Recursive Utility Under Continuous and Discontinuous Information. Mathematical Finance, Vol. 18, Issue 2, pp. 199-238, April 2008. Available at SSRN: https://ssrn.com/abstract=1105178 or http://dx.doi.org/10.1111/j.1467-9965.2007.00330.x

Mark D. Schroder (Contact Author)

Michigan State University - The Eli Broad Graduate School of Management ( email )

323 Eppley Center
East Lansing, MI 48824-1121
United States
517-432-0622 (Phone)
517-432-1080 (Fax)

Costis Skiadas

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-2328 (Phone)
847-491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/skiadas/research/research.htm

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