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Title:CRRA utility maximization under risk constraints PDF Logo
Authors:Moreno-Bromberg, Santiago
Pirvu, Traian A.
Réveillac, Anthony
Issue Date:2011
Series/Report no.:SFB 649 discussion paper 2011-043
Abstract:This paper studies the problem of optimal investment with CRRA (constant, relative risk aversion) preferences, subject to dynamic risk constraints on trading strategies. The market model considered is continuous in time and incomplete; furthermore, financial assets are modeled by Itô processes. The dynamic risk constraints (time, state dependent) are generated by risk measures. The optimal trading strategy is characterized by a quadratic BSDE. Special risk measures (Value-at-Risk, Tail Value-at-Risk and Limited Expected Loss ) are considered and a three-fund separation result is established in these cases. Numerical results emphasize the effect of imposing risk constraints on trading.
Subjects:BSDE
CRRA preferences
constrained utility maximization
correspondences
risk measures
JEL:G10
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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