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Stochastic maximum principle under probability distortion (1710.11432v2)
Published 31 Oct 2017 in q-fin.MF and math.PR
Abstract: Within the framework of the cumulative prospective theory of Kahneman and Tversky, this paper considers a continuous-time behavioral portfolio selection problem whose model includes both running and terminal terms in the objective functional. Despite the existence of S-shaped utility functions and probability distortions, a necessary condition for optimality is derived. The results are applied to various examples.
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