A dual characterization of self-generation and exponential forward performances

Abstract

We propose a mathematical framework for the study of a family of random fields--called forward performances--which arise as numerical representation of certain rational preference relations in mathematical finance. Their spatial structure corresponds to that of utility functions, while the temporal one reflects a Nisio-type semigroup property, referred to as self-generation. In the setting of semimartingale financial markets, we provide a dual formulation of self-generation in addition to the original one, and show equivalence between the two, thus giving a dual characterization of forward performances. Then we focus on random fields with an exponential structure and provide necessary and sufficient conditions for self-generation in that case. Finally, we illustrate our methods in financial markets driven by Itô-processes, where we obtain an explicit parametrization of all exponential forward performances.

Published in at http://dx.doi.org/10.1214/09-AAP607 the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org)

References in corpus (1)

• Utility Maximization with a Stochastic Clock and an Unbounded Random Endowment

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