Abstract
Ambiguity, also called Knightian or model uncertainty, is a key feature in financial modeling. A recent paper by Maccheroni et al. (preprint, 2004) characterizes investor preferences under aversion against both risk and ambiguity. Their result shows that these preferences can be numerically represented in terms of convex risk measures. In this paper we study the corresponding problem of optimal investment over a given time horizon, using a duality approach and building upon the results by Kramkov and Schachermayer (Ann. Appl. Probab. 9, 904–950, 1999; Ann. Appl. Probab. 13, 1504–1516, 2003).
Similar content being viewed by others
References
Aubin J.-P., Ekeland I. (1984) Applied Nonlinear Analysis. Wiley, New York
Barrieu, P., El Karoui, N. Optimal derivatives design under dynamic risk measures. In: Mathematics of Finance, pp. 13–25. Contemp. Math., 351, Amer. Math. Soc. Providence, (2004)
Ben-Tal A., Teboulle M. (1987) Penalty functions and duality in stochastic programming via \(\phi\)-divergence functionals. Math. Oper. Res. 12, 224–240
Bordigoni, G., Matoussi, A., Schweizer, M. A stochastic control approach to a robust maximization problem. To appear in Proceedings of Abel Symposium. Springer, Berlin Heidelberg New York. http://www.math.ethz.ch/~mschweiz/ms_publ_ger.html
Burgert C., Rüschendorf L. (2005) Optimal consumption strategies under model uncertainty. Stat. Dec. 23, 1–14
Carr P., Geman H., Madan D. (2001) Pricing and hedging in incomplete markets. J. Financ. Econom. 62, 131–167
Cheridito P., Delbaen F., Kupper M. (2006) Dynamic monetary risk measures for bounded discrete-time processes. Electronic J. Probab. 11, 57–106
Csiszár I. (1963) Eine informationstheoretische Ungleichung und ihre Anwendung auf den Beweis der Ergodizität von Markoffschen Ketten. Magyar Tud. Akad. Mat. Kutató Int. Közl. 8, 85–108
Csiszár I. (1967) On topological properties of f-divergences. Studia. Sci. Math. Hungarica 2, 329–339
Delbaen F. (2006). The structure of m-stable sets and in particular of the set of risk-neutral measures. In: Yor M., Émery M. (eds). Memoriam Paul-André Meyer - Séminaire de Probabilités XXXIX. Springer, Berlin Heidelberg New York, pp. 215–258
Delbaen F., Schachermayer W. (1994) A general version of the fundamental theorem of asset pricing. Math. Ann. 300, 463–520
Detlefsen K., Scandolo G. (2005) Conditional and dynamic convex risk measures. Financ. Stoch. 9, 539–561
El Karoui N., Peng S., Quenez M.C. (2001) A dynamic maximum principle for the optimization of recursive utilities under constraints. Ann. Appl. Probab. 11, 664–693
Epstein L., Schneider M. (2003) Recursive multiple-priors. J. Econ. Theory 113, 1–31
Föllmer, H., Gundel, A. Robust projections in the class of martingale measures. To appear in Illinois J. Math. 50. http://www.math.hu-berlin.de/~foellmer/publications_anf.html
Föllmer H., Schied A. (2002) Convex measures of risk and trading constraints. Financ. Stoch. 6, 429–447
Föllmer H., Schied A. (2002). Robust representation of convex measures of risk. In: Sandmann K., Schönbucher P.J. (eds). Advances in Finance and Stochastics. Essays in Honour of Dieter Sondermann. Springer, Berlin Heidelberg New York, pp. 39–56
Föllmer, H., Schied, A. Stochastic Finance An Introduction in Discrete Time (de Gruyter Studies in Mathematics 27). Berlin: Walter de Gruyter, second revised and extended edition (2004)
Frittelli M., Rosazza Gianin E. (2002) Putting order in risk measures. J. Bank. Financ. 26, 1473–1486
Gilboa I., Schmeidler D. (1989) Maxmin expected utility with non-unique prior. J. Math. Econ. 18, 141–153
Hansen L., Sargent T. (2001) Robust control and model uncertainty. Am. Econ. Rev. 91, 60–66
Hernández-Hernández D., Schied A. (2006) Robust utility maximization in a stochastic factor model. Stat. Decisions 24, 109–125
Hernández-Hernández, D., Schied, A. A control approach to robust utility maximization with logarithmic utility and time-consistent penalties. Preprint, TU Berlin (2006). http://www.math. tu-berlin.de/~schied/publications.html
Jouini, E., Schachermayer, W., Touzi, N. Law invariant risk measures have the Fatou property. Preprint, Université Paris Dauphine, (2005). http://www.crest.fr/pageperso/touzi/touzi.htm
Kramkov D., Schachermayer W. (1999) The asymptotic elasticity of utility functions and optimal investment in incomplete markets. Ann. Appl. Probab. 9, 904–950
Kramkov D., Schachermayer W. (2003) Necessary and sufficient conditions in the problem of optimal investment in incomplete markets. Ann. Appl. Probab. 13, 1504–1516
Maccheroni, F., Marinacci, M., Rustichini, A. Ambiguity aversion, malevolent nature, and the variational representation of preferences. Preprint (2004). http://web.econ.unito.it/gma/fabio.htm
Krätschmer V. (2005) Robust representation of convex risk measures by probability measures. Financ. Stoch. 9, 597–608
Müller, M. Market completion and robust utility maximization. PhD Thesis, Humboldt- Universität zu Berlin (2005). http://edoc.hu-berlin.de/docviews/abstract.php?id=26287
Quenez, M.-C. Optimal portfolio in a multiple-priors model. In: Dalang, R., Dozzi, M., Russo, F. (eds.) Seminar on Stochastic Analysis, Random Fields and Applications IV, pp. 291–321. Progr. Probab., 58, Birkhäuser, Basel (2004)
Rockafellar, R.T. Convex Analysis (Princeton Mathematical Series 28) NJ, Princeton. Princeton University Press, 1970. Reprinted (1997).
Schied A. (2005) Optimal investments for robust utility functionals in complete market models. Math. Oper. Res. 30, 750–764
Schied A. (2004) On the Neyman–Pearson problem for law-invariant risk measures and robust utility functionals. Ann. Appl. Probab. 14, 1398–1423
Schied, A. Risk measures and robust optimization problems. To appear in Stoch. Models. http://www.math.tu-berlin.de/~schied/publications.html
Schied A., Wu C.-T. (2005) Duality theory for optimal investments under model uncertainty. Stat. Decisions 23, 199–217
Schmeidler D. (1989) Subjective probability and expected utility without additivity. Econometrica 57, 571–587
Schroder M., Skiadas C. (2003) Optimal lifetime consumption-portfolio strategies under trading constraints and generalized recursive preferences. Stoch. Proc. Appl. 108, 155–202
Talay D., Zheng Z. (2002) Worst case model risk management. Financ. Stoch. 6, 517–537
Weber S. (2006) Distribution-invariant risk measures, information, and dynamic consistency. Math. Financ. 16, 419–442
Author information
Authors and Affiliations
Corresponding author
Additional information
Supported by Deutsche Forschungsgemeinschaft through the SFB 649 “Economic Risk”.
Rights and permissions
About this article
Cite this article
Schied, A. Optimal investments for risk- and ambiguity-averse preferences: a duality approach. Finance Stoch 11, 107–129 (2007). https://doi.org/10.1007/s00780-006-0024-2
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00780-006-0024-2