Worst-Case Scenario Portfolio Optimization: a New Stochastic Control Approach

Ralf Korn () and Olaf Menkens ()

Mathematical Methods of Operations Research, 2005, vol. 62, issue 1, 123-140

Abstract: We consider the determination of portfolio processes yielding the highest worst-case bound for the expected utility from final wealth 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. A particular application of our setting is to model crash scenarios where both the number and the height of the crash are uncertain but bounded. Also the situation of changing market coefficients after a possible crash is analyzed. Copyright Springer-Verlag Berlin Heidelberg 2005

Keywords: Optimal portfolios; crash modelling; Bellman principle; equilibrium strategies; worst-case scenario; changing market coefficients (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s00186-005-0444-3

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