Distributionally robust portfolio maximisation and marginal utility pricing in one period financial markets

Jan Obloj and Johannes Wiesel

Papers from arXiv.org

Abstract: We consider the optimal investment and marginal utility pricing problem of a risk averse agent and quantify their exposure to a small amount of model uncertainty. Specifically, we compute explicitly the first-order sensitivity of their value function, optimal investment policy and marginal option prices to model uncertainty. The latter is understood as replacing a baseline model $\mathbb{P}$ with an adverse choice from a small Wasserstein ball around $\mathbb{P}$ in the space of probability measures. Our sensitivities are thus fully non-parametric. We show that the results entangle the baseline model specification and the agent's risk attitudes. The sensitivities can behave in a non-monotone way as a function of the baseline model's Sharpe's ratio, the relative weighting of assets in an agent's portfolio can change and marginal prices can increase when an agent faces model uncertainty.

Date: 2021-05, Revised 2021-11
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (11)

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