Robust control and recursive utility (Q1424721)

The paper considers a robust control criterion of the form \[ \widehat{V}_0= \inf_{x}\left\{E^x\left[\int_0^T e^{-\beta t}u(c_t)\, dt\right]+\theta R^x\right\}, \] where \(c_t\) is the consumption rate, \(u\) is a real-valued felicity function on \(R_+\), \(\theta\) is a positive constant, \(R^x=E^x [\int_0^T e^{-\beta t}| x_t| ^2\,dt ]\), \(x_t\) is a `drift' in the Girsanov theorem. The author's approach differs from previous considerations. For example, a finite horizon is adopted, a general stochastic discount process is allowed. It is proved that a finite-horizon version of the robust control criterion can be described as a recursive utility which in continuous time takes the form of the Stochastic Differential Utility (SDU). While it has been previously noted that Bellman equations arising in robust control settings are of the same form as Bellman equations arising from SDU maximization, here this connection is shown directly without reference to any underlying dynamics, or Markov structure.