OPTIMAL PORTFOLIO CHOICE WITH CRASH RISK AND MODEL AMBIGUITY

Author:

KORN RALF1,MÜLLER LUKAS1

Affiliation:

1. Department of Mathematics, University of Kaiserslautern, Erwin-Schroedinger-Strasse, 67663 Kaiserslautern, Germany

Abstract

In this paper, we consider a continuous time portfolio optimization problem that includes the possibility of a crash scenario as well as parameter uncertainty. To do this, we combine the worst-case scenario approach, introduced by Korn & Wilmott (2002) with a model ambiguity approach that is also based on Knightian uncertainty. In our model, the crash scenario occurs at the worst possible time for the investor, which also implies that there can be no crash at all. For the modeling of the parameter uncertainty, we choose a general definition of the sets of possible drift and volatility parameters, conditioned by the solution of an optimization problem. In addition, these sets may be different in the pre-crash and post-crash market. We solve this portfolio problem and then consider two particular examples with box uncertainty and ellipsoidal drift ambiguity.

Publisher

World Scientific Pub Co Pte Ltd

Subject

General Economics, Econometrics and Finance,Finance

Cited by 3 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. Optimal consumption, investment and life insurance selection under robust utilities;International Journal of Financial Engineering;2023-07-08

2. OPTIMAL PORTFOLIO CHOICE WITH CRASH AND DEFAULT RISK;International Journal of Theoretical and Applied Finance;2022-06

3. Optimal dynamic reinsurance with worst-case default of the reinsurer;European Actuarial Journal;2022-04-08

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