Worst-case portfolio optimization in discrete time

Lihua Chen () and Ralf Korn ()
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Lihua Chen: University of Kaiserslautern
Ralf Korn: University of Kaiserslautern

Mathematical Methods of Operations Research, 2019, vol. 90, issue 2, No 3, 197-227

Abstract: Abstract We consider discrete-time portfolio problems of an investor when taking the possibility of market crashes into account. In the case of the logarithmic utility function, we construct the worst-case optimal portfolio strategy by an indifference principle. Then, we extend the setting to general utility functions and derive the worst-case optimal portfolio processes via the characterization by a dynamic programming equation. Furthermore, we numerically examine the convergence behavior of the discrete-time worst-case optimal portfolio processes for the choice of popular utility functions when the time between two possible price changes tends to zero.

Keywords: Worst-case portfolio optimization; Market crash; Dynamic programming (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s00186-019-00668-8

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