Worst Case Portfolio Optimization and HJB-Systems

Ralf Korn and Mogens Steffensen
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Ralf Korn: Fachbereich Mathematik, Universität Kaiserslautern
Mogens Steffensen: Department of Applied Mathematics and Statistics, University of Copenhagen

No 2006/02, FRU Working Papers from University of Copenhagen. Department of Economics. Finance Research Unit

Abstract: We formulate a portfolio optimization problem as a game where the investor chooses a portfolio and his opponent, the market, chooses some market crashes. The asymmetry of the opponents' decision processes leads to a new and delicate generalization of the classical Hamilton-Jacob-Bellman equation in stochastic control. We characterize the optimal controls in general and specify them further in the cases of HARA, logarithmic, and exponential utility of the investor.

Keywords: continuous-time game; asymmetric decisions; market crash; utility optimization (search for similar items in EconPapers)
Pages: 16 pages
New Economics Papers: this item is included in nep-cba and nep-upt
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