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A utility maximization approach to hedging in incomplete markets

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Abstract.

In this paper we introduce the notion of portfolio optimization by maximizing expected local utility. This concept is related to maximization of expected utility of consumption but, contrary to this common approach, the discounted financial gains are consumed immediately. In a general continuous-time market optimal portfolios are obtained by pointwise solution of equations involving the semimartingale characteristics of the underlying securities price process. The new concept is applied to hedging problems in frictionless, incomplete markets.

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  1. Institut für Mathematische Stochastik, Universität Freiburg, Eckerstraße 1, D-79104 Freiburg i. Br., Germany, (e-mail: kallsen@stochastik.uni-freiburg.de), , , , , , DE

    Jan Kallsen

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  1. Jan Kallsen
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Kallsen, J. A utility maximization approach to hedging in incomplete markets. Mathematical Methods of OR 50, 321–338 (1999). https://doi.org/10.1007/s001860050100

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  • DOI: https://doi.org/10.1007/s001860050100

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