⚠️ Paper Alert ⚠️
Remember the Twitter argument between and ?
Recall how it hinged on logarithmic vs. linear utility functions?
Using optimal control, we show utilities are a red herring
joint w/
stanford.edu/~guillean/pape
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You still have a variance penalty. The point is that at the margin you should have linear utility, especially if you can rebalance to other strategies.
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The arbitrageurs make money, ergo the LP could just decide to run the arbitrage against themselves. If they don't, it's because of risk considerations, ergo utility factors in for your argument. Not a red herring.
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Log vs. Linear is the red herring. Any concave, cadlag utility function will work (c.f. how we use phi)
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note that linear isn't concave :)
heh true but more generally linear doesn't imply that there's any impetus to rebalance
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