Worst-case portfolio optimization in discrete time (Q2009178)

The paper is devoted to the worst-case portfolio optimization problem in a discrete-time framework. First, an extended motivation why a discrete-time framework is important to be studied, is given. One of the reasons is that some interesting real-life problems are not tractable in the framework of the continuous-time setting. Furthermore, if the parameters in the discrete-time financial markets are chosen appropriately, they can be regarded as an approximation of continuous-time models. This observation serves for the authors as another reason for the importance of considering the worst-case portfolio optimization problem in a discrete-time setting. In the spirit of this approach, the worst-case optimal portfolio processes for the logarithmic utility function by an indifference argument are derived, and a simple portfolio problem with a jump process model for the stock price is solved as an example. Then the authors turn to a more general study of the worst-case portfolio optimization problem in discrete time. They derive a system of dynamic programming equations and verify the optimal strategies as a system of difference equations. These results are applied to the power utility, log utility and exponential utility functions. Further, the convergence of the worst-case optimal discrete-time strategy to the continuous-time one in the power utility case is established explicitly.