Backward nonlinear expectation equations

Building on an abstract framework for dynamic nonlinear expectations that comprises g-, G- and random G-expectations, we develop a theory of backward nonlinear expectation equations of the form

$$\begin{aligned} X_t = {\mathcal {E}}_t \Bigl [{\textstyle \int _t^T} g(s,X) \mu ({\mathrm {d}}s) + \xi \Bigr ], \quad t \in [0,T]. \end{aligned}$$

We provide existence, uniqueness, and stability results and establish convergence of the associated discrete-time nonlinear aggregations. As an application, we construct continuous-time recursive utilities under ambiguity and identify the corresponding utility processes as limits of discrete-time recursive utilities.

     

The constructive theory of preference relations on a locally compact space

This paper, which is written within a rigorously constructive framework, deals with preference relations (strict weak orders) on a locally compact space X, and with the representation of such relations by continuous utility functions (order isomorphisms) from X into ℝ. Necessary conditions are given for finding the values of a utility function algorithmically in terms of the parameters when X is a locally compact, convex subset of R^N. These conditions single out the class of admissible preference relations, which are investigated in some detail. The paper concludes with some results on the algorithmic continuity of the process which assigns utility functions to admissible preference relations.The work of this paper can be regarded as a recursive development of preference and utility theory.     

Nonstandard utilities and the foundation of game theory

In a recent paperFishburn [1972] discussed some consequences which the use of non-Archimedean utilities has on finite two-person zero-sum games. We shall show that the state of affairs with non-Archimedean utilities is not so different from the results undervon Neumann-Morgenstern utilities asFishburn asserts, if we represent the utilities in an appropriate non-Archimedean ordered field (nonstandard model of the real numbers) and admit that the components of the optimal strategies also may assume values in this ordered field. Moreover it is proved that for every utility space (in the sense ofHausner [1954] a nonstandard utility function exists.     

Ordinal utility and economic price indices

Summary In economic price index theory, a reference level of utility is needed for measuring the change in the cost of living oetween a base period and a comparison period. A reference level function can be used to derive this reference utility level from the utilities attained at the base and at the comparison prices. Depending on the scale type of the underlying utility function, the reference level function has to satisfy certain invariance conditions. In this paper, these conditions are formulated as functional equations for interval scales and for ordinal utility scales. By solving these equations, we characterize the class of admissible reference level functions for the respective scale type.We thank J. Aczél and an anonymous referee for their comments on an earlier version of the paper.     

The Pearson system of utility functions

This paper describes a parametric family of utility functions for decision analysis. The parameterization embeds the HARA class in a four-parameter representation for the risk aversion function. The resulting utility functions can have only four shapes: concave, convex, S-shaped, and reverse S-shaped. This makes the family suited for both expected utility and prospect theory. The paper also describes an alternative technique to estimate the four parameters from elicited utilities, which is simpler than standard fitting by minimization of the mean quadratic error.     

Random expected utility theory with a continuum of prizes

This note generalizes Gul and Pesendorfer’s random expected utility theory, a stochastic reformulation of von Neumann–Morgenstern expected utility theory for lotteries over a finite set of prizes, to the circumstances with a continuum of prizes. Let [0, M] denote this continuum of prizes; assume that each utility function is continuous, let \(C_0[0,M]\) be the set of all utility functions which vanish at the origin, and define a random utility function to be a finitely additive probability measure on \(C_0[0,M]\) (associated with an appropriate algebra). It is shown here that a random choice rule is mixture continuous, monotone, linear, and extreme if, and only if, the random choice rule maximizes some regular random utility function. To obtain countable additivity of the random utility function, we further restrict our consideration to those utility functions that are continuously differentiable on [0, M] and vanish at zero. With this restriction, it is shown that a random choice rule is continuous, monotone, linear, and extreme if, and only if, it maximizes some regular, countably additive random utility function. This generalization enables us to make a discussion of risk aversion in the framework of random expected utility theory.     

A Belief-Dependent Utility Model

This paper proposes a belief-dependent utility function(BDU). The BDU is based on the fact that the beliefs of acts have inconsistent impacts on utilities. The existence and uniqueness result of the BDU function is provided. It is then proved that the BDU function can provide risk attitude analysis and general comparative analysis as powerful as those presented by the classical expected utility theories.

     

Dual control Monte-Carlo method for tight bounds of value function under Heston stochastic volatility model

The aim of this paper is to study the fast computation of the lower and upper bounds on the value function for utility maximization under the Heston stochastic volatility model with general utility functions. It is well known there is a closed form solution to the HJB equation for power utility due to its homothetic property. It is not possible to get closed form solution for general utilities and there is little literature on the numerical scheme to solve the HJB equation for the Heston model. In this paper we propose an efficient dual control Monte-Carlo method for computing tight lower and upper bounds of the value function. We identify a particular form of the dual control which leads to the closed form upper bound for a class of utility functions, including power, non-HARA and Yaari utilities. Finally, we perform some numerical tests to see the efficiency, accuracy, and robustness of the method. The numerical results support strongly our proposed scheme.     

Super-replication and utility maximization in large financial markets

We study the problems of super-replication and utility maximization from terminal wealth in a semimartingale model with countably many assets. After introducing a suitable definition of admissible strategy, we characterize superreplicable contingent claims in terms of martingale measures. Utility maximization problems are then studied with the convex duality method, and we extend finite-dimensional results to this setting. The existence of an optimizer is proved in a suitable class of generalized strategies: this class has also the property that maximal expected utility is the limit of maximal expected utilities in finite-dimensional submarkets. Finally, we illustrate our results with some examples in infinite dimensional factor models.     

The structure of optimal consumption streams in general incomplete markets

We prove that for any incomplete market and any concave utility function the marginal propensities to consume and to save are always positive. Furthermore, we introduce a class of incomplete markets that includes almost all well known examples of market incompleteness in finance and macroeconomics. Two concrete examples are idiosyncratic income shocks and general, diffusion driven incompleteness. For all markets in our class we explicitly solve the associated utility maximization problem by a recursive construction and derive many important properties. For example, precautionary savings and the diminishing marginal propensity to consume. Effectively, the class is characterized by these two economic properties. We also prove that the growth rate of consumption is always larger when markets are incomplete and that precautionary savings are monotone increasing in the size of idiosyncratic risk. Our construction can be implemented computationally by an efficient, robust numerical scheme. We thank two anonymous referees for useful comments and remarks.     

Recursiveness of indifference prices and translation-invariant preferences

We consider an economic agent with dynamic preferences over a set of uncertain monetary payoffs. We assume that preferences are updated in a time-consistent way as more information is becoming available. Our main result is that the agent’s indifference prices are recursive if and only if the preferences are translation-invariant. The proof is based on a characterization of time-consistency of dynamic preferences in terms of indifference sets. As a special case, we obtain that expected utility leads to recursive indifference prices if and only if absolute risk aversion is constant, that is, the Bernoulli utility function is linear or exponential.     

Asymptotic existence of proportionally fair allocations

Fair division has long been an important problem in the economics literature. In this note, we consider the existence of proportionally fair allocations of indivisible goods, i.e., allocations of indivisible goods in which every agent gets at least her proportionally fair share according to her own utility function. We show that when utilities are additive and utilities for individual goods are drawn independently at random from a distribution, proportionally fair allocations exist with high probability if the number of goods is a multiple of the number of agents or if the number of goods grows asymptotically faster than the number of agents.     

Building an Optimal Portfolio in Discrete Time in the Presence of Transaction Costs

Abstract

Portfolio theory covers different approaches to the construction of a portfolio offering maximum expected returns for a given level of risk tolerance where the goal is to find the optimal investment rule. Each investor has a certain utility for money which is reflected by the choice of a utility function. In this article, a risk averse power utility function is studied in discrete time for a large class of underlying probability distribution of the returns of the asset prices. Each investor chooses, at the beginning of an investment period, the feasible portfolio allocation which maximizes the expected value of the utility function for terminal wealth. Effects of both large and small proportional transaction costs on the choice of an optimal portfolio are taken into account. The transaction regions are approximated by using asymptotic methods when the proportional transaction costs are small and by using expansions about critical points for large transaction costs.     

考虑成员风险态度的零售商资金约束闭环供应链定价与回收决策

针对由制造商、回收商和资金约束的零售商组成的三级闭环供应链,考虑供应链成员面对市场需求不确定时表现出不同的风险态度,研究了闭环供应链的定价与回收决策问题。首先给出了产品的市场需求函数与回收商的回收成本函数;然后基于均值-方差法,构建了各成员和闭环供应链的效用函数;进一步地,依据博弈论的思想,确定了不同渠道权力结构下的最优零售价格、最优回收率和最优批发价格;最后分析了闭环供应链成员风险态度和贷款利率对供应链最优决策和效用的影响。研究表明,成员风险态度和贷款利率能够影响闭环供应链最优决策和效用,其中,风险规避的零售商和制造商对闭环供应链其他成员均有利,但是对自身和闭环供应链不利;风险规避的回收商对闭环供应链成员均不利;贷款利率的增长会降低成员和闭环供应链的效用。     

The path player game

We give an explicit PDE characterization for the solution of the problemof maximizing the utility of both terminal wealth and intertemporal consumption undermodel uncertainty. The underlying market model consists of a risky asset, whosevolatility and long-term trend are driven by an external stochastic factor process. Therobust utility functional is defined in terms of a HARA utility function with risk aversionparameter 0 < α < 1 and a dynamically consistent coherent risk measure, whichallows for model uncertainty in the distributions of both the asset price dynamics andthe factor process. Ourmethod combines recent results by Wittmüß (Robust optimizationof consumption with random endowment, 2006) on the duality theory of robustoptimization of consumption with a stochastic control approach to the dual problemof determining a ‘worst-case martingale measure’.     

A decidable theory of type assignment

This article investigates a theory of type assignment (assigning types to lambda terms) called ETA which is intermediate in strength between the simple theory of type assignment and strong polymorphic theories like Girard’s F (Proofs and types. Cambridge University Press, Cambridge, 1989). It is like the simple theory and unlike F in that the typability and type-checking problems are solvable with respect to ETA. This is proved in the article along with three other main results: (1) all primitive recursive functionals of finite type are representable in ETA; (2) every term typable in ETA has a unique normal form; (3) there is a function defined by ${{\varepsilon}_0}$ -recursion which takes every typable term to a natural number which is an upper bound to the lengths of all βη-reduction sequences starting with that term.     

The Ackermann function. a theoretical,computational, and formula manipulative study

Ackermann's function is of highly recursive nature and of two arguments. It is here treated as a class of functions of one argument, where the other argument defines the member of the class. The first members are expressed with elementary functions, the higher members with a hierarchy of primitive recursive functions. The number of calls of the function needed in a straightforward recursive computation is given for the first members. The maximum depth in the recursion during the evaluation is investigated.Results from tests with the Ackermann function of recursive procedure implementations in ALGOL-60, ALGOL W, PL/I and SIMULA-67 on IBM 360/75 and CD 6600 are given.A SYMBAL formula manipulating program, that automatically solves recurrence relations for the first members of the function class and for the number of calls needed in their straightforward computation, is given.The Ackermann rating of programming languages is discussed.     

Design of price mechanisms for network resource allocation via price of anarchy

We study the design of price mechanisms for communication network problems in which a user’s utility depends on the amount of flow she sends through the network, and the congestion on each link depends on the total traffic flows over it. The price mechanisms are characterized by a set of axioms that have been adopted in the cost-sharing games, and we search for the price mechanisms that provide the minimum price of anarchy. We show that, given the non-decreasing and concave utilities of users and the convex quadratic congestion costs in each link, if the price mechanism cannot depend on utility functions, the best achievable price of anarchy is ${{4(3-2 \sqrt{2}) \approx 31.4 \% }}$ . Thus, the popular marginal cost pricing with price of anarchy less than 1/3 ≈ 33.3% is nearly optimal. We also investigate the scenario in which the price mechanisms can be made contingent on the users’ preference profile while such information is available.     

Functional Equations and Weierstrass Transforms II

The Weierstrass transform is examined on the space of Lebesgue measurable function on Rⁿ having at most exponential growth, thereby extending to higher dimensions the one-dimensional consideration of [4]. The resulting theory has utility in the study of certain functional equations of “translation” type; two such applications are presented.