Characterization of Fully Coupled FBSDE in Terms of Portfolio Optimization

Authors

Samuel Drapeau, Peng Luo and Dewen Xiong

Date

2020

Journal

Electronic Journal of Probability, 25

Abstract

We provide a verification and characterization result of optimal maximal sub-solutions of BSDEs in terms of fully coupled forward backward stochastic differential equations. We illustrate the application thereof in utility optimization with random endowment under probability and discounting uncertainty. We show with explicit examples how to quantify the costs of incompleteness when using utility indifference pricing, as well as a way to find optimal solutions for recursive utilities.
The former title was “Characterization of Fully Coupled FBSDE in Terms of Portfolio Optimization under Probability and Discounting Uncertainty”

Keywords

Fully Coupled FBSDE, Portfolio Optimization, Random Endowment, Probability and Discounting Uncertainty

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