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S-shaped Utility Maximization with VaR Constraint and Partial Information

Published: June 11, 2025 | arXiv ID: 2506.10103v1

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.

Country of Origin
🇬🇧 United Kingdom

Page Count
19 pages

Category
Quantitative Finance:
Mathematical Finance