Robust utility maximization with limited downside risk in incomplete markets

Anne Gundel and Stefan Weber

Stochastic Processes and their Applications, 2007, vol. 117, issue 11, 1663-1688

Abstract: In this article we consider the portfolio selection problem of an agent with robust preferences in the sense of Gilboa and Schmeidler [Itzhak Gilboa, David Schmeidler, Maxmin expected utility with non-unique prior, Journal of Mathematical Economics 18 (1989) 141-153] in an incomplete market. Downside risk is constrained by a robust version of utility-based shortfall risk. We derive an explicit representation of the optimal terminal wealth in terms of certain worst case measures which can be characterized as minimizers of a dual problem. This dual problem involves a three-dimensional analogue of f-divergences which generalize the notion of relative entropy.

Keywords: Robust; utility; maximization; Optimal; portfolio; choice; Utility-based; shortfall; risk; Convex; risk; measures; Semimartingales (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (15)

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