G-expected utility maximization with ambiguous equicorrelation

Chi Seng Pun

Quantitative Finance, 2021, vol. 21, issue 3, 403-419

Abstract: This paper studies a class of expected utility maximization problems with respect to a controlled state process with multiple noises, whose pairwise correlations are equal and ambiguous. Using the G-expectation theory, we solve for the robust stochastic controls explicitly from a Hamilton–Jacobi–Bellman–Isaacs equation and deduce a robust choice of the equicorrelation coefficient. We also generalize the results to a block equicorrelation structure, where we consider more than two ambiguous parameters that could be interactive in general. We manage to derive an analytical solution to the robust stochastic controls under an ambiguous two-block equicorrelated structure via the solution to a system of polynomial equations. The results have significant implications for the investment and reinsurance problems among many others.

Date: 2021
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DOI: 10.1080/14697688.2020.1777321

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