Robust Worst-Case Optimal Investment

24 Pages Posted: 5 Jul 2013

See all articles by Sascha Desmettre

Sascha Desmettre

Johannes Kepler University Linz

Ralf Korn

University of Kaiserslautern - Department of Mathematics

Peter Ruckdeschel

University of Oldenburg - School of Mathematics and Science

Frank Thomas Seifried

University of Trier

Date Written: July 3, 2013

Abstract

Based on a robustness concept adapted from mathematical statistics, we investigate robust optimal investment strategies for worst-case crash scenarios when the maximum crash height is not known a priori. We specify an efficiency criterion in terms of the certainty equivalents of optimal terminal wealth and explicitly solve the investor’s portfolio problem for CRRA risk preferences. We also study the behavior of the minimax crash height and the efficiency of the associated strategies in the limiting case of infinitely many crashes.

Keywords: worst-case, crash scenario, robust optimization, Knightian uncertainty, efficiency, min-max approach

JEL Classification: G11, D81, C10

Suggested Citation

Desmettre, Sascha and Korn, Ralf and Ruckdeschel, Peter and Seifried, Frank Thomas, Robust Worst-Case Optimal Investment (July 3, 2013). Available at SSRN: https://ssrn.com/abstract=2289684 or http://dx.doi.org/10.2139/ssrn.2289684

Sascha Desmettre (Contact Author)

Johannes Kepler University Linz ( email )

Altenbergerstr. 69
A-4040 Linz, Upper Austria 4040
Austria

HOME PAGE: http://shorturl.at/dwX47

Ralf Korn

University of Kaiserslautern - Department of Mathematics ( email )

D-67653 Kaiserslautern
Germany

Peter Ruckdeschel

University of Oldenburg - School of Mathematics and Science ( email )

PO box 2503
Oldenburg, 26111
Germany

Frank Thomas Seifried

University of Trier ( email )

Department IV - Mathematics
Universitätsring 19
Trier, 54296
Germany

HOME PAGE: http://sites.google.com/site/seifriedfinance/

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