OPTIMAL INVESTMENT UNDER PARTIAL INFORMATION AND ROBUST VAR-TYPE CONSTRAINT

DOI10.1142/S0219024923500176MaRDI QIDQ6182055zbMATH OpenOpenAlexFDO

Authors Nicole Bäuerle, An Chen

Publication date 23 January 2024

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2212.04394

zbMATH Keywords

risk managementuncertainty about driftvalue-at-risk-based regulation

Mathematics Subject Classification ID

Portfolio theory (91G10) Statistical methods; risk measures (91G70)

Abstract: The present paper extends the literature on utility maximization by combining the framework of partial information and (robust) regulatory constraints. Partial information is characterized by the fact that the stock price itself is observable to the optimizing financial institution, but the outcome of the market price of risk $heta$ is unknown to the institution. The regulator builds the same or a different belief about the market price of risk as the financial institution. The solution to our optimization problem takes the same form as in the full information case: the optimal wealth can be expressed as a decreasing function of the state price density, and the regulatory threshold is ensured in the intermediate economic states. The main difference lies in the terminal state price density depending on the entire evolution of the estimated market price of risk $hatheta(s)$. The subjective evaluation of the regulatory constraint influences the width of the ensured region.

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Cited in

(3)

• Bayesian adaptive portfolio optimization for DC pension plans
• Scalarized utility-based multi-asset risk measures
• Relative portfolio optimization via a value at risk based constraint

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