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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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.
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