Downside risk minimization via a large deviations approach

DOI10.1214/11-AAP781MaRDI QIDQ417076zbMATHOpenAlexFDO

Authors Hideo Nagai

Publication date 13 May 2012

Published in The Annals of Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1205.0672

zbMATH Keywords

large deviationlong-term investmentH-J-B equation of ergodic typerisk-sensitive stochastic control

Mathematics Subject Classification ID

Large deviations (60F10) Auctions, bargaining, bidding and selling, and other market models (91B26) Variational methods for elliptic systems (35J50) Dynamic programming in optimal control and differential games (49L20) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: We consider minimizing the probability of falling below a target growth rate of the wealth process up to a time horizon $T$ in an incomplete market model, and then study the asymptotic behavior of minimizing probability as $Toinfty$. This problem can be closely related to an ergodic risk-sensitive stochastic control problem in the risk-averse case. Indeed, in our main theorem, we relate the former problem concerning the asymptotics for risk minimization to the latter as its dual. As a result, we obtain an expression of the limit value of the probability as the Legendre transform of the value of the control problem, which is characterized as the solution to an H-J-B equation of ergodic type, in the case of a Markovian incomplete market model.

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Cited in

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