SIAM Journal on Control and Optimization, 53(1), 58-90, 2015
35 Pages Posted: 7 Feb 2014 Last revised: 9 May 2015
Date Written: February 6, 2014
We determine the optimal robust investment strategy of an individual who targets at a given rate of consumption and seeks to minimize the probability of lifetime ruin when she does not have perfect confidence in the drift of the risky asset. Using stochastic control, we characterize the value function as the unique classical solution of an associated Hamilton-Jacobi-Bellman (HJB) equation, obtain feedback forms for the optimal investment and drift distortion, and discuss their dependence on various model parameters. In analyzing the HJB equation, we establish the existence and uniqueness of viscosity solution using Perron’s method, and then upgrade regularity by working with an equivalent convex problem obtained via the Cole-Hopf transformation. We show the original value function may lose convexity for a class of parameters and the Isaacs condition may fail. Numerical examples are also included to illustrate our results.
Keywords: Probability of lifetime ruin, ambiguity aversion, drift uncertainty, viscosity solutions, Perron’s method, regularity
Suggested Citation: Suggested Citation
Bayraktar, Erhan and Zhang, Yuchong, Minimizing the Probability of Lifetime Ruin Under Ambiguity Aversion (February 6, 2014). SIAM Journal on Control and Optimization, 53(1), 58-90, 2015. Available at SSRN: https://ssrn.com/abstract=2391987 or http://dx.doi.org/10.2139/ssrn.2391987