Optimal arbitrage under model uncertainty
From MaRDI portal
arbitragefully nonlinear parabolic equationsmaximal containment probabilityminimal solutionsmodel uncertaintyrobust portfolio choicestochastic controlstochastic game
Maximum principles in context of PDEs (35B50) Martingales with continuous parameter (60G44) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Financial applications of other theories (91G80)
Abstract: In an equity market model with "Knightian" uncertainty regarding the relative risk and covariance structure of its assets, we characterize in several ways the highest return relative to the market that can be achieved using nonanticipative investment rules over a given time horizon, and under any admissible configuration of model parameters that might materialize. One characterization is in terms of the smallest positive supersolution to a fully nonlinear parabolic partial differential equation of the Hamilton--Jacobi--Bellman type. Under appropriate conditions, this smallest supersolution is the value function of an associated stochastic control problem, namely, the maximal probability with which an auxiliary multidimensional diffusion process, controlled in a manner which affects both its drift and covariance structures, stays in the interior of the positive orthant through the end of the time-horizon. This value function is also characterized in terms of a stochastic game, and can be used to generate an investment rule that realizes such best possible outperformance of the market.
The authors consider an equity market model with immeasurable uncertainty regarding relative risk and covariance structure of its assets. The papers provides answers to the following questions: (1) what is the highest return on an investment relative to the market that can be achieved using non-anticipative investment rules over a given horizon under any admissible configuration of model parameters, and (2), what are the weights corresponding to the assets of an investment rule that realizes this maximum return? The highest return is obtained here via the smallest positive supersolution to a nonlinear PDE of Hamilton-Jacobi-Bellman type which, under appropriate conditions, is the value function of an associated stochastic control problem. This value function can also be interpreted from the perspective of stochastic game theory.
Recommendations
- Arbitrage-free modeling under Knightian uncertainty
- On arbitrage and duality under model uncertainty and portfolio constraints
- Market Models with Optimal Arbitrage
- Optimal hedging and parameter uncertainty
- On optimal strategies for utility maximizers in the arbitrage pricing model
- On optimal arbitrage
- Maximizing expected utility in the arbitrage pricing model
- scientific article; zbMATH DE number 1948538
- On utility maximization under model uncertainty in discrete‐time markets
- Stability of no-arbitrage property under model uncertainty
Cites work
- A necessary and sufficient condition for absence of arbitrage with tame portfolios
- A supermartingale characterization of a set of stochastic integrals
- A supermartingale characterization of sets of stochastic integrals and applications
- A theoretical framework for the pricing of contingent claims in the presence of model uncertainty
- Analysis of continuous strict local martingales via \(h\)-transforms
- Analysis of market weights under volatility-stabilized market models
- Bubbles, convexity and the Black-Scholes equation
- Compactification methods in the control of degenerate diffusions: existence of an optimal control
- Continuous-Time Red and Black: How to Control a Diffusion to a Goal
- Controlling a Process to a Goal in Finite Time
- Convex Duality Approach to the Optimal Control of Diffusions
- Diversity and relative arbitrage in equity markets
- Dual formulation of second order target problems
- Duality theory for optimal investments under model uncertainty
- Equivalent and absolutely continuous measure changes for jump-diffusion processes
- FEYNMAN–KAC FORMULAS FOR BLACK–SCHOLES-TYPE OPERATORS
- Financial markets with volatility uncertainty
- Game approach to the optimal stopping problem†
- Hedging under arbitrage
- scientific article; zbMATH DE number 4180191 (Why is no real title available?)
- scientific article; zbMATH DE number 3877055 (Why is no real title available?)
- scientific article; zbMATH DE number 3951715 (Why is no real title available?)
- scientific article; zbMATH DE number 4004696 (Why is no real title available?)
- scientific article; zbMATH DE number 3664138 (Why is no real title available?)
- scientific article; zbMATH DE number 3720745 (Why is no real title available?)
- scientific article; zbMATH DE number 44587 (Why is no real title available?)
- scientific article; zbMATH DE number 51724 (Why is no real title available?)
- scientific article; zbMATH DE number 158461 (Why is no real title available?)
- scientific article; zbMATH DE number 3505708 (Why is no real title available?)
- scientific article; zbMATH DE number 1061253 (Why is no real title available?)
- scientific article; zbMATH DE number 2006037 (Why is no real title available?)
- scientific article; zbMATH DE number 927094 (Why is no real title available?)
- scientific article; zbMATH DE number 3245885 (Why is no real title available?)
- Maxmin expected utility with non-unique prior
- Minimizing or Maximizing the Expected Time to Reach Zero
- Numerical solution of an optimal control problem with a probability criterion
- On optimal arbitrage
- On the Existence of Optimal Controls
- On the regularity theory of fully nonlinear parabolic equations: I
- On the regularity theory of fully nonlinear parabolic equations: II
- On the regularity theory of fully nonlinear parabolic equations: III
- On the representation of semimartingales
- ON THE SELECTION OF A MARKOV PROCESS FROM A SYSTEM OF PROCESSES AND THE CONSTRUCTION OF QUASI-DIFFUSION PROCESSES
- Optimal control of diffusion processes and hamilton–jacobi–bellman equations part 2 : viscosity solutions and uniqueness
- Optimal control of diffustion processes and hamilton-jacobi-bellman equations part I: the dynamic programming principle and application
- Optimal investments for risk- and ambiguity-averse preferences: a duality approach
- Optimal stopping for dynamic convex risk measures
- Optimal stopping for non-linear expectations. I
- Optimal Stopping With Multiple Priors
- OPTIONS WRITTEN ON STOCKS WITH KNOWN DIVIDENDS
- Probabilistic aspects of arbitrage
- Quasi-sure stochastic analysis through aggregation
- Random \(G\)-expectations
- Reaching Zero Rapidly
- Relative arbitrage in volatility-stabilized markets
- Robust maximization of asymptotic growth
- Robust Preferences and Robust Portfolio Choice
- Robust projections in the class of martingale measures
- Robustness of the Black and Scholes Formula
- Robustness of the Black-Scholes approach in the case of options on several assets
- SMOOTHNESS OF THE VALUE FUNCTION FOR A CONTROLLED DIFFUSION PROCESS IN A DOMAIN
- Stochastic optimal control. The discrete time case
- Stochastic Portfolio Theory: an Overview
- Super-replication in stochastic volatility models under portfolio constraints
- Superreplication in stochastic volatility models and optimal stopping
- Superreplication of European multiasset derivatives with bounded stochastic volatility
- THE BLACK SCHOLES BARENBLATT EQUATION FOR OPTIONS WITH UNCERTAIN VOLATILITY AND ITS APPLICATION TO STATIC HEDGING
- The existence of absolutely continuous local martingale measures
- The exit measure of a supermartingale
- The numéraire portfolio in semimartingale financial models
- Worst case model risk management
Cited in
(30)- Robust valuation, arbitrage ambiguity and profit \& loss analysis
- A no-arbitrage theorem for uncertain stock model
- An interval of no-arbitrage prices in financial markets with volatility uncertainty
- Superreplication under model uncertainty in discrete time
- Arbitrage and duality in nondominated discrete-time models
- Stochastic target games with controlled loss
- Model-independent superhedging under portfolio constraints
- Consistent price systems under model uncertainty
- Maximizing expected utility in the arbitrage pricing model
- Distribution of the time to explosion for one-dimensional diffusions
- Utility maximization under model uncertainty in discrete time
- On optimal strategies for utility maximizers in the arbitrage pricing model
- Probabilistic aspects of arbitrage
- The geometry of relative arbitrage
- Robust maximization of asymptotic growth under covariance uncertainty
- Outperforming the market portfolio with a given probability
- Robust maximization of asymptotic growth
- Functional portfolio optimization in stochastic portfolio theory
- In Pursuit of Zeta-3, by Paul J. Nahin
- Market Models with Optimal Arbitrage
- Robust utility maximization of terminal wealth with drift and volatility uncertainty
- Robust asymptotic growth in stochastic portfolio theory under long‐only constraints
- Model‐free portfolio theory: A rough path approach
- Short communication: finding the nonnegative minimal solutions of Cauchy PDEs in a volatility-stabilized market
- Macroscopic properties of equity markets: stylized facts and portfolio performance
- Relative arbitrage opportunities in an extended mean field system
- The \(CEV\) model and its application to financial markets with volatility uncertainty
- Optimization of relative arbitrage
- Diversity-weighted portfolios with negative parameter
- On optimal arbitrage
This page was built for publication: Optimal arbitrage under model uncertainty
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q657697)
