Author:
Bernard Carole,Junike Gero,Lux Thibaut,Vanduffel Steven
Abstract
AbstractDybvig (1988a, 1988b) solves in a complete market setting the problem of finding a payoff that is cheapest possible in reaching a given target distribution (“cost-efficient payoff”). In the presence of ambiguity, the distribution of a payoff is, however, no longer known with certainty. We study the problem of finding the cheapest possible payoff whose worst-case distribution stochastically dominates a given target distribution (“robust cost-efficient payoff”) and determine solutions under certain conditions. We study the link between “robust cost-efficiency” and the maxmin expected utility setting of Gilboa and Schmeidler (1989), as well as more generally in a possibly nonexpected robust utility setting. Specifically, we show that solutions to maxmin robust expected utility are necessarily robust cost-efficient. We illustrate our study with examples involving uncertainty both on the drift and on the volatility of the risky asset.
Funder
Carl von Ossietzky Universität Oldenburg
Publisher
Springer Science and Business Media LLC