Optimal investment for all time horizons and Martin boundary of space-time diffusions

TL;DR

This paper develops a framework for investment strategies over indefinite time horizons using Hamilton-Jacobi-Bellman equations, providing explicit solutions and new criteria applicable to various financial models.

Contribution

It introduces a novel approach to constructing optimal investment criteria for indefinite horizons via explicit solutions of linearized HJB equations.

Findings

Explicit integral representations of positive solutions to the linearized equations

Construction of a broad family of optimality criteria including closed-form examples

Application of potential theory and convex analysis to financial models

Abstract

This paper is concerned with the axiomatic foundation and explicit construction of a general class of optimality criteria that can be used for investment problems with multiple time horizons, or when the time horizon is not known in advance. Both the investment criterion and the optimal strategy are characterized by the Hamilton-Jacobi-Bellman equation on a semi-infinite time interval. In the case when this equation can be linearized, the problem reduces to a time-reversed parabolic equation, which cannot be analyzed via the standard methods of partial differential equations. Under the additional uniform ellipticity condition, we make use of the available description of all minimal solutions to such equations, along with some basic facts from potential theory and convex analysis, to obtain an explicit integral representation of all positive solutions. These results allow us to construct a large family of the aforementioned optimality criteria, including some closed form examples in relevant financial models.