Minimizing the Probability of Lifetime Ruin Under Ambiguity Aversion
AbstractWe determine the optimal robust investment strategy of an individual who targets at a given rate of consumption and seeks to minimize the probability of lifetime ruin when she does not have perfect confidence in the drift of the risky asset. Using stochastic control, we characterize the value function as the unique classical solution of an associated Hamilton-Jacobi-Bellman (HJB) equation, obtain feedback forms for the optimal investment and drift distortion, and discuss their dependence on various model parameters. In analyzing the HJB equation, we establish the existence and uniqueness of viscosity solution using Perron's method, and then upgrade regularity by working with an equivalent convex problem obtained via the Cole-Hopf transformation. We show the original value function may lose convexity for a class of parameters and the Isaacs condition may fail. Numerical examples are also included to illustrate our results.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1402.1809.
Date of creation: Feb 2014
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-15 (All new papers)
- NEP-SOG-2014-02-15 (Sociology of Economics)
- NEP-UPT-2014-02-15 (Utility Models & Prospect Theory)
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