Utility maximization in incomplete markets with random endowment

This paper solves the following problem of mathematical finance: to find a solution to the problem of maximizing utility from terminal wealth of an agent with a random endowment process, in the general, semimartingale model for incomplete markets, and to characterize it via the associated dual problem. We show that this is possible if the dual problem and its domain are carefully defined. More precisely, we show that the optimal terminal wealth is equal to the inverse of marginal utility evaluated at the solution to the dual problem, which is in the form of the regular part of an element of \(({\bf L}^\infty)^*\) (the dual space of \({\bf L}^\infty\)).

Authors and Affiliations

1. Department of Mathematics, USC, 1042 W 36 Pl, DRB 155, Los Angeles, CA 90089-1113, USA (e-mail: cvitanic@math.usc.edu) , , , , , , US

   Jakša Cvitanić

2. Department of Statistics, Probability Theory and Actuarial Mathematics, Vienna University of Technology, Wiedner Hauptstrasse 8-10, A-1040 Wien, Austria (e-mail: wschach@fam.tuwien.ac.at) , , , , , , AT

   Walter Schachermayer

3. Department of Statistics, Columbia University, New York, NY 10027, USA (e-mail: wanghui@stat.columbia.edu) , , , , , , US

   Hui Wang

Manuscript received: November 1999; final version received: February 2000

An erratum to this article is available at http://dx.doi.org/10.1007/s00780-017-0331-9.

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