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A control approach to robust utility maximization with logarithmic utility and time-consistent penalties

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  • Hernández-Hernández, Daniel
  • Schied, Alexander

Abstract

We propose a stochastic control approach to the dynamic maximization of robust utility functionals that are defined in terms of logarithmic utility and a dynamically consistent convex risk measure. The underlying market is modeled by a diffusion process whose coefficients are driven by an external stochastic factor process. In particular, the market model is incomplete. Our main results give conditions on the minimal penalty function of the robust utility functional under which the value function of our problem can be identified with the unique classical solution of a quasilinear PDE within a class of functions satisfying certain growth conditions. The fact that we obtain classical solutions rather than viscosity solutions is important for the use of numerical algorithms, whose applicability is demonstrated in examples.

Suggested Citation

  • Hernández-Hernández, Daniel & Schied, Alexander, 2006. "A control approach to robust utility maximization with logarithmic utility and time-consistent penalties," SFB 649 Discussion Papers 2006-061, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2006-061
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    References listed on IDEAS

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    1. Lars Peter Hansen & Thomas J Sargent, 2014. "Robust Control and Model Uncertainty," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 5, pages 145-154, World Scientific Publishing Co. Pte. Ltd..
    2. Hernández-Hernández Daniel & Schied Alexander, 2006. "Robust utility maximization in a stochastic factor model," Statistics & Risk Modeling, De Gruyter, vol. 24(1/2006), pages 1-17, July.
    3. Schied, Alexander, 2005. "Optimal investments for risk- and ambiguity-averse preferences: A duality approach," SFB 649 Discussion Papers 2005-051, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    4. E. Jouini & W. Schachermayer & N. Touzi, 2008. "Optimal Risk Sharing For Law Invariant Monetary Utility Functions," Mathematical Finance, Wiley Blackwell, vol. 18(2), pages 269-292, April.
    5. Hernández-Hernández Daniel & Schied Alexander, 2006. "Robust utility maximization in a stochastic factor model," Statistics & Risk Modeling, De Gruyter, vol. 24(1), pages 109-125, July.
    6. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    7. Schied, Alexander & Wu, Ching-Tang, 2005. "Duality theory for optimal investments under model uncertainty," SFB 649 Discussion Papers 2005-025, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    8. Burgert Christian & Rüschendorf Ludger, 2005. "Optimal consumption strategies under model uncertainty," Statistics & Risk Modeling, De Gruyter, vol. 23(1), pages 1-14, January.
    9. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    10. Alexander Schied, 2005. "Optimal Investments for Robust Utility Functionals in Complete Market Models," Mathematics of Operations Research, INFORMS, vol. 30(3), pages 750-764, August.
    11. Schied Alexander & Wu Ching-Tang, 2005. "Duality theory for optimal investments under model uncertainty," Statistics & Risk Modeling, De Gruyter, vol. 23(3), pages 199-217, March.
    12. Hernández-Hernández, Daniel & Schied, Alexander, 2005. "Robust utility maximization in a stochastic factor model," SFB 649 Discussion Papers 2006-007, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    13. Burgert Christian & Rüschendorf Ludger, 2005. "Optimal consumption strategies under model uncertainty," Statistics & Risk Modeling, De Gruyter, vol. 23(1/2005), pages 1-14, January.
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    1. repec:hum:wpaper:sfb649dp2007-026 is not listed on IDEAS
    2. Schied, Alexander, 2007. "Robust optimal control for a consumption-investment problem," SFB 649 Discussion Papers 2007-026, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
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    5. Hernández-Hernández, Daniel & Schied, Alexander, 2007. "Robust maximization of consumption with logarithmic utility," SFB 649 Discussion Papers 2007-030, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    6. repec:hum:wpaper:sfb649dp2007-030 is not listed on IDEAS

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