State-dependent utility maximization in Lévy markets

Abstract

We revisit Merton's portfolio optimization problem under boun-ded state-dependent utility functions, in a market driven by a Lévy process $Z$ extending results by Karatzas et. al. (1991) and Kunita (2003). The problem is solved using a dual variational problem as it is customarily done for non-Markovian models. One of the main features here is that the domain of the dual problem enjoys an explicit "parametrization", built on a multiplicative optional decomposition for nonnegative supermartingales due to Föllmer and Kramkov (1997). As a key step in obtaining the representation result we prove a closure property for integrals with respect to Poisson random measures, a result of interest on its own that extends the analog property for integrals with respect to a fixed semimartingale due to Mémin (1980). In the case that (i) the Lévy measure of $Z$ is atomic with a finite number of atoms or that (ii) $\Delta S_t/S_{t^{-}}={\zeta }_t\vartheta (\Delta Z_t)$ for a process $\zeta$ and a deterministic function $\vartheta$, we explicitly characterize the admissible trading strategies and show that the dual solution is a risk-neutral local martingale.