Robust utility maximization in a multivariate financial market with stochastic drift
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Abstract: We study a utility maximization problem in a financial market with a stochastic drift process, combining a worst-case approach with filtering techniques. Drift processes are difficult to estimate from asset prices, and at the same time optimal strategies in portfolio optimization problems depend crucially on the drift. We approach this problem by setting up a worst-case optimization problem with a time-dependent uncertainty set for the drift. Investors assume that the worst possible drift process with values in the uncertainty set will occur. This leads to local optimization problems, and the resulting optimal strategy needs to be updated continuously in time. We prove a minimax theorem for the local optimization problems and derive the optimal strategy. Further, we show how an ellipsoidal uncertainty set can be defined based on filtering techniques and demonstrate that investors need to choose a robust strategy to be able to profit from additional information.
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Cites work
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- scientific article; zbMATH DE number 2127976 (Why is no real title available?)
- scientific article; zbMATH DE number 722978 (Why is no real title available?)
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Cited in
(7)- Robust utility maximizing strategies under model uncertainty and their convergence
- Effective approximation methods for constrained utility maximization with drift uncertainty
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- Model uncertainty and expert opinions in continuous-time financial markets
- Distributionally robust portfolio maximization and marginal utility pricing in one period financial markets
- OPTIMAL INVESTMENT UNDER PARTIAL INFORMATION AND ROBUST VAR-TYPE CONSTRAINT
- Strategies with minimal norm are optimal for expected utility maximisation under high model ambiguity
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