On Worst-Case Investment with Applications in Finance and Insurance Mathematics

Ralf Korn and Olaf Menkens
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Ralf Korn: Universität Kaiserslautern, Fachbereich Mathematik
Olaf Menkens: Universität Kaiserslautern, Fachbereich Mathematik

A chapter in Interacting Stochastic Systems, 2005, pp 397-407 from Springer

Abstract: Summary We review recent results on the new concept of worst-case portfolio optimization, i.e. we consider the determination of portfolio processes which yield the highest worst-case expected utility bound if the stock price may have uncertain (down) jumps. The optimal portfolios are derived as solutions of non-linear differential equations which itself are consequences of a Bellman principle for worst-case bounds. They are by construction non-constant ones and thus differ from the usual constant optimal portfolios in the classical examples of the Merton problem. A particular application of such strategies is to model crash possibilities where both the number and the height of the crash is uncertain but bounded. We further solve optimal investment problems in the presence of an additional risk process which is the typical situation of an insurer.

Keywords: Stock Price; Stock Prex; Optimal Portfolio; Optimal Investment; Risk Process (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-540-27110-9_18

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DOI: 10.1007/3-540-27110-4_18

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