Portfolio optimization under model uncertainty and BSDE games

Bernt Oksendal () and Agnès Sulem ()
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Bernt Oksendal: CMA - Center of Mathematics for Applications [Oslo] - University of Oslo
Agnès Sulem: INRIA Rocquencourt - MATHFI - INRIA - Ecole des Ponts ParisTech - Université Paris-Est

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Abstract: We consider some robust optimal portfolio problems for markets modeled by (possibly non-Markovian) jump diffusions. Mathematically the situation can be described as a stochastic differential game, where one of the players (the agent) is trying to find the portfolio which maximizes the utility of her terminal wealth, while the other player ("the market") is controlling some of the unknown parameters of the market (e.g. the underlying probability measure, representing a model uncertainty problem) and is trying to minimize this maximal utility of the agent. This leads to a worst case scenario control problem for the agent. In the Markovian case such problems can be studied using the Hamilton-Jacobi-Bellman-Isaacs (HJBI) equation, but these methods do not work in the non-Markovian case. We approach the problem by transforming it to a stochastic differential game for backward differential equations (BSDE game). Using comparison theorems for BSDEs with jumps we arrive at criteria for the solution of such games, in the form of a kind of non-Markovian analogue of the HJBI equation. The results are illustrated by examples.

Keywords: model uncertainty; portfolio optimization; exponential utility; BSDEs; stochastic differential games; Itô -Lévy processes (search for similar items in EconPapers)
Date: 2011-03-01
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