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On Worst-Case Investment with Applications in Finance and Insurance Mathematics

In: Interacting Stochastic Systems

Author

Listed:
  • Ralf Korn

    (Universität Kaiserslautern, Fachbereich Mathematik)

  • Olaf Menkens

    (Universität Kaiserslautern, Fachbereich Mathematik)

Abstract

Summary We review recent results on the new concept of worst-case portfolio optimization, i.e. we consider the determination of portfolio processes which yield the highest worst-case expected utility bound if the stock price may have uncertain (down) jumps. The optimal portfolios are derived as solutions of non-linear differential equations which itself are consequences of a Bellman principle for worst-case bounds. They are by construction non-constant ones and thus differ from the usual constant optimal portfolios in the classical examples of the Merton problem. A particular application of such strategies is to model crash possibilities where both the number and the height of the crash is uncertain but bounded. We further solve optimal investment problems in the presence of an additional risk process which is the typical situation of an insurer.

Suggested Citation

  • Ralf Korn & Olaf Menkens, 2005. "On Worst-Case Investment with Applications in Finance and Insurance Mathematics," Springer Books, in: Jean-Dominique Deuschel & Andreas Greven (ed.), Interacting Stochastic Systems, pages 397-407, Springer.
    • Handle: RePEc:spr:sprchp:978-3-540-27110-9_18
    DOI: 10.1007/3-540-27110-4_18
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