Dynamic robust duality in utility maximization

DOI10.1007/S00245-016-9329-5MaRDI QIDQ519879zbMATH OpenOpenAlexFDO

Authors B. Øksendal, Agnès Sulem

Publication date 31 March 2017

Published in Applied Mathematics and Optimization (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1304.5040, http://hdl.handle.net/10852/58521

zbMATH Keywords

backward stochastic differential equationdynamic duality methodItô-Lévy marketrobust dualityrobust portfolio optimizationstochastic maximum principle

Mathematics Subject Classification ID

Applications of functional analysis in optimization, convex analysis, mathematical programming, economics (46N10) Optimality conditions for problems involving randomness (49K45) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Stochastic models in economics (91B70) Portfolio theory (91G10) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: A celebrated financial application of convex duality theory gives an explicit relation between the following two quantities: (i) The optimal terminal wealth $X^{\ast }(T):=X_{varph{i}^{\ast }}(T)$ of the problem to maximize the expected $U$-utility of the terminal wealth $X_{varphi}(T)$ generated by admissible portfolios $varphi(t),0leqtleqT$ in a market with the risky asset price process modeled as a semimartingale; (ii) The optimal scenario $fracd{Q}^{\ast }dP$ of the dual problem to minimize the expected $V$-value of $fracdQdP$ over a family of equivalent local martingale measures $Q$, where $V$ is the convex conjugate function of the concave function $U$. In this paper we consider markets modeled by It^o-L'evy processes. In the first part we use the maximum principle in stochastic control theory to extend the above relation to a emph{dynamic} relation, valid for all $tin[0,T]$. We prove in particular that the optimal adjoint process for the primal problem coincides with the optimal density process, and that the optimal adjoint process for the dual problem coincides with the optimal wealth process, $0leqtleqT$. In the terminal time case $t=T$ we recover the classical duality connection above. We get moreover an explicit relation between the optimal portfolio $varph{i}^{\ast }$ and the optimal measure $Q^{\ast }$. We also obtain that the existence of an optimal scenario is equivalent to the replicability of a related $T$-claim. In the second part we present robust (model uncertainty) versions of the optimization problems in (i) and (ii), and we prove a similar dynamic relation between them. In particular, we show how to get from the solution of one of the problems to the other. We illustrate the results with explicit examples.

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Cited in

(15)

• Robust optimization of mixed CVaR STARR ratio using copulas
• Duality theory for robust utility maximisation
• Portfolio optimization under convex incentive schemes
• Stochastic differential games with inside information
• Robust utility maximization with unbounded random endowment
• Convex duality in constrained mean-variance portfolio optimization
• Constrained Quadratic Risk Minimization via Forward and Backward Stochastic Differential Equations
• Duality and optimality conditions in stochastic optimization and mathematical finance
• Dynamic convex duality in constrained utility maximization
• Robust Dual Dynamic Programming
• Conjugate duality in problems of constrained utility maximization
• MARKOWITZ'S PORTFOLIO OPTIMIZATION IN AN INCOMPLETE MARKET
• Model uncertainty stochastic mean-field control
• The numeraire portfolio for unbounded semimartingale
• Fully coupled mean-field forward-backward stochastic differential games under model uncertainty

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