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On worst-case investment with applications in finance and insurance mathematics

Korn, Ralf and Menkens, Olaf (2005) On worst-case investment with applications in finance and insurance mathematics. In: Deuschel, Jean-Dominique and Greven, Andreas, (eds.) Interacting Stochastic Systems. Springer Berlin Heidelberg, pp. 397-407. ISBN 978-3-540-27110-9

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Abstract

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.

Item Type:Book Section
Refereed:Yes
Uncontrolled Keywords:worst-case portfolio optimization;
Subjects:Mathematics
DCU Faculties and Centres:DCU Faculties and Schools > Faculty of Science and Health > School of Mathematical Sciences
Publisher:Springer Berlin Heidelberg
Official URL:http://dx.doi.org/10.1007/3-540-27110-4_18
Copyright Information:The original publication is available at www.springerlink.com
Use License:This item is licensed under a Creative Commons Attribution-NonCommercial-Share Alike 3.0 License. View License
ID Code:536
Deposited On:02 Sep 2008 15:16 by DORAS Administrator. Last Modified 16 Feb 2009 15:53

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