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Duality theory for optimal investments under model uncertainty

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  • Schied Alexander
  • Wu Ching-Tang
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    Abstract

    Robust utility functionals arise as numerical representations of investor preferences, when the investor is uncertain about the underlying probabilistic model and averse against both risk and model uncertainty. In this paper, we study the duality theory for the problem of maximizing the robust utility of the terminal wealth in a general incomplete market model. We also allow for very general sets of prior models. In particular, we do not assume that all prior models are equivalent to each other, which allows us to handle many economically meaningful robust utility functionals such as those defined by AVaRλ, concave distortions, or convex capacities. We also show that dropping the equivalence of prior models may lead to new effects such as the existence of arbitrage strategies under the least favorable model.

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    Bibliographic Info

    Article provided by De Gruyter in its journal Statistics & Risk Modeling.

    Volume (Year): 23 (2005)
    Issue (Month): 3/2005 (March)
    Pages: 199-217

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    Handle: RePEc:bpj:strimo:v:23:y:2005:i:3/2005:p:199-217:n:3

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    Cited by:
    1. Daniel Hernandez–Hernandez & Alexander Schied, 2005. "Robust Utility Maximization in a Stochastic Factor Model," SFB 649 Discussion Papers SFB649DP2006-007, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Aug 2006.
    2. Daniel Hernandez–Hernandez & Alexander Schied, 2006. "A Control Approach to Robust Utility Maximization with Logarithmic Utility and Time-Consistent Penalties," SFB 649 Discussion Papers SFB649DP2006-061, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Gundel, Anne & Weber, Stefan, 2008. "Utility maximization under a shortfall risk constraint," Journal of Mathematical Economics, Elsevier, vol. 44(11), pages 1126-1151, December.
    4. Alexander Schied, 2005. "Optimal Investments for Risk- and Ambiguity-Averse Preferences: A Duality Approach," SFB 649 Discussion Papers SFB649DP2005-051, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Aug 2006.
    5. Keita Owari, 2013. "A Robust Version of Convex Integral Functionals," CARF F-Series CARF-F-319, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    6. Daniel Hern\'andez-Hern\'andez & Leonel P\'erez-Hern\'andez, 2012. "Robust utility maximization for L\'evy processes: Penalization and solvability," Papers 1206.0715, arXiv.org.
    7. Sigrid Kallblad & Jan Obloj & Thaleia Zariphopoulou, 2013. "Time--consistent investment under model uncertainty: the robust forward criteria," Papers 1311.3529, arXiv.org.
    8. Alexander Schied, 2007. "Robust Optimal Control for a Consumption-investment Problem," SFB 649 Discussion Papers SFB649DP2007-026, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    9. Anis Matoussi & Hanen Mezghani & Mohamed Mnif, 2013. "Maximization of recursive utilities under convex portfolio constraints," Papers 1307.0872, arXiv.org, revised Oct 2013.
    10. Thomas Knispel, 2012. "Asymptotics of robust utility maximization," Papers 1203.1191, arXiv.org.
    11. Sigrid K\"allblad, 2013. "Risk- and ambiguity-averse portfolio optimization with quasiconcave utility functionals," Papers 1311.7419, arXiv.org.
    12. Keita Owari, 2011. "ON ADMISSIBLE STRATEGIES IN ROBUST UTILITY MAXIMIZATION (Forthcoming in "Mathematics and Financial Economics")," CARF F-Series CARF-F-257, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    13. Keita Owari, 2011. "On Admissible Strategies in Robust Utility Maximization," Papers 1109.5512, arXiv.org, revised Mar 2012.

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