Learning or Robust Control

38 Pages Posted: 2 Mar 2007

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Lue Wu

Goethe University Frankfurt - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

Abstract

Model mis-specification can cause substantial utility losses in portfolio planning. In this paper, we compare two approaches to cope with this problem, robust control and learning. We derive the optimal portfolio strategies and the utility losses due to model mis-specification. Surprisingly, neither learning nor robust control is uniformly superior to the naive approach where the investor simply ignores model risk. Furthermore, a comparison of the two approaches shows that learning takes some time to have an impact, so that short-term investors are in some (but not all) cases better off with robust control than with learning.

Keywords: Portfolio Selection, Model Uncertainty, Learning, Robust Control

JEL Classification: G11, G12

Suggested Citation

Branger, Nicole and Schlag, Christian and Wu, Lue, Learning or Robust Control (March 2007). Paris December 2007 Finance International Meeting AFFI - EUROFIDAI. Available at SSRN: https://ssrn.com/abstract=967305 or http://dx.doi.org/10.2139/ssrn.967305

Nicole Branger (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

Lue Wu

Goethe University Frankfurt - Department of Finance ( email )

Mertonstr. 17-21/Uni-Postbox 77
Frankfurt am Main, 60054
Germany
+49 69 798 28459 (Phone)
+49 69 798 22788 (Fax)

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