SIAM Journal on Control and Optimization, Vol.48, No.5, 2984-3002, 2009
ON MAXIMIZING CRRA UTILITY IN REGIME SWITCHING MARKETS WITH RANDOM ENDOWMENT
Optimizing utility from terminal wealth with random endowment presents the difficulty that only numerical solutions are available for a power utility function. Numerical solutions are hard to obtain. In this paper, we derive an approximation to the solution of the relevant optimization problem. An additional analysis, e. g., a sensitivity analysis of the parameters, can be performed based on this approximation. As an extension of the Black-Scholes model, we consider a regime switching market model.
Keywords:random endowment;optimal utility;incomplete market;CRRA utility;dynamic programming;HJB equation