Ergodic robust maximisation of asymptotic growth with stochastic factor processes

David Itkin, Benedikt Koch, Martin Larsson and Josef Teichmann

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We consider a robust asymptotic growth problem under model uncertainty in the presence of stochastic factors. We fix two inputs representing the instantaneous covariance for the asset price process X, which depends on an additional stochastic factor process Y, as well as the invariant joint density of X and Y. The factor process Y has continuous trajectories, but is not required to be a semimartingale. Our setup allows drift uncertainty in X and model uncertainty for the local dynamics of Y. This work builds on a recent paper of Kardaras and Robertson [20], where the authors consider an analogous problem but without the additional factor process. Under suitable, quite weak assumptions, we are able to characterise the robust optimal trading strategy and the robust optimal growth rate. The optimal strategy is shown to be functionally generated and, remarkably, does not depend on the factor process Y. Our result provides a comprehensive answer to a question proposed by Fernholz in 2002. We also show that the optimal strategy remains optimal even in the more restricted case where Y is a semimartingale and the joint covariation structure of X and Y is prescribed as a function of X and Y. Our results are obtained using a combination of techniques from partial differential equations, calculus of variations and generalised Dirichlet forms.

Keywords: ergodic process; stochastic portfolio theory; functionally generated portfolios; stochastic factors; generalised dirichlet forms; invariant measure; robust finance (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2026-10-01
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Published in Finance and Stochastics, 1, October, 2026, 30(4), pp. 1225-1268. ISSN: 0949-2984

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