S-shaped Utility Maximization with VaR Constraint and Partial Information
By: Dongmei Zhu, Ashley Davey, Harry Zheng
Potential Business Impact:
Finds best way to invest money safely.
We study S-shaped utility maximisation with VaR constraint and unobservable drift coefficient. Using the Bayesian filter, the concavification principle, and the change of measure, we give a semi-closed integral representation for the dual value function and find a critical wealth level that determines if the constrained problem admits a unique optimal solution and Lagrange multiplier or is infeasible. We also propose three algorithms (Lagrange, simulation, deep neural network) to solve the problem and compare their performances with numerical examples.
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