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A note on the worst case approach for a market with a stochastic interest rate

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  • Dariusz Zawisza

Abstract

We solve robust optimization problem and show the example of the market model for which the worst case measure is not a martingale measure. In our model the instantaneous interest rate is determined by the Hull-White model and the investor employs the HARA utility to measure his satisfaction.To protect against the model uncertainty he uses the worst case measure approach. The problem is formulated as a stochastic game between the investor and the market from the other side. PDE methods are used to find the saddle point and the precise verification argument is provided.

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  • Dariusz Zawisza, 2020. "A note on the worst case approach for a market with a stochastic interest rate," Papers 2001.01998, arXiv.org.
    • Handle: RePEc:arx:papers:2001.01998
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