Optimal growth under model uncertainty

Yuhong Xu

The North American Journal of Economics and Finance, 2022, vol. 60, issue C

Abstract: The optimal growth of a wealth process toward a goal is studied under ambiguous markets with first- and second-order moment uncertainties relating to stock returns. Optimal strategies and value functions are solved explicitly. A verification theorem is proved to show that the results solve the original stochastic control problem. Quantitative analyses of the investment strategies indicate that a rational individual with ambiguity aversion reduces market participation when return and volatility are uncorrelated, while there is an exception for synchronous return and volatility. The welfare of shorting a discounted reward is computed, which demonstrates that in an ambiguous pricing economy, investors can generate a positive premium via appropriate asset allocations.

Keywords: Optimal investment; Kelly criterion; Ambiguity aversion; Model uncertainty (search for similar items in EconPapers)
JEL-codes: C61 D81 G11 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:60:y:2022:i:c:s1062940821002254

DOI: 10.1016/j.najef.2021.101634

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