Maximization of Nonconcave Utility Functions in Discrete-Time Financial Market Models

Carassus, L. and Rásonyi, Miklós (2016) Maximization of Nonconcave Utility Functions in Discrete-Time Financial Market Models. MATHEMATICS OF OPERATIONS RESEARCH, 41 (1). pp. 146-173. ISSN 0364-765X

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Abstract

This paper investigates the problem of maximizing expected terminal utility in a (generically incomplete) discrete-time financial market model with finite time horizon. By contrast to the standard setting, a possibly nonconcave utility function U is considered, with domain of definition equal to the whole real line. Simple conditions are presented that guarantee the existence of an optimal strategy for the problem. In particular, the asymptotic elasticity of U plays a decisive role: Existence can be shown when it is strictly greater at -infinity than at +infinity.

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