Robust utility maximisation with intractable claims

DOI10.1007/S00780-023-00512-2MaRDI QIDQ6074011zbMATH OpenOpenAlexFDO

Authors Yunhong Li, Zuo Quan Xu, Xun Yu Zhou

Publication date 12 October 2023

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2304.06938

zbMATH Keywords

calculus of variationsintractable claimquantile formulationrank-dependent utilityrobust modelvariational inequalities

Mathematics Subject Classification ID

Utility theory (91B16) Financial markets (91G15) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We study a continuous-time expected utility maximization problem in which the investor at maturity receives the value of a contingent claim in addition to the investment payoff from the financial market. The investor knows nothing about the claim other than its probability distribution, hence an ``intractable claim. In view of the lack of necessary information about the claim, we consider a robust formulation to maximize her utility in the worst scenario. We apply the quantile formulation to solve the problem, expressing the quantile function of the optimal terminal investment income as the solution of certain variational inequalities of ordinary differential equations. In the case of an exponential utility, the problem reduces to a (non-robust) rank--dependent utility maximization with probability distortion whose solution is available in the literature.

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Cited in

(2)

• Robust expected utility maximization with medial limits
• Behavioral robust mean-variance portfolio selection with an intractable claim

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