Convergence of Optimal Expected Utility for a Sequence of Discrete-Time Markets

We examine Kreps' (2019) conjecture that optimal expected utility in the classic Black--Scholes--Merton (BSM) economy is the limit of optimal expected utility for a sequence of discrete-time economies that "approach" the BSM economy in a natural sense: The $n$th discrete-time economy is generated by a scaled $n$-step random walk, based on an unscaled random variable $ζ$ with mean zero, variance one, and bounded support. We confirm Kreps' conjecture if the consumer's utility function $U$ has asymptotic elasticity strictly less than one, and we provide a counterexample to the conjecture for a utility function $U$ with asymptotic elasticity equal to 1, for $ζ$ such that $E[ζ^3] > 0.$

No reviews yet.

No comments yet.