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Worst-case portfolio optimization in a market with bubbles

Christoph Belak ; Sören Christensen (Institutionen för matematiska vetenskaper, matematisk statistik) ; Olaf Menkens
International Journal of Theoretical and Applied Finance (0219-0249). Vol. 19 (2016), 2, p. artikel nr 1650009.
[Artikel, refereegranskad vetenskaplig]

We investigate a utility maximization problem in the presence of asset price bubbles. At random times, the investor receives warnings that a bubble has formed in the market which may lead to a crash in the risky asset. We propose a regime-switching model for the warnings and we make no assumptions about the distribution of the timing and the size of the crashes. Instead, we assume that the investor takes a worst-case perspective towards their impacts, i.e. the investor maximizes her expected utility under the worst-case crash scenario. We characterize the value function by a system of Hamilton–Jacobi–Bellman equations and derive a coupled system of ordinary differential equations for the optimal strategies. Numerical examples are provided.



Denna post skapades 2016-04-05. Senast ändrad 2016-11-03.
CPL Pubid: 234085

 

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Institutioner (Chalmers)

Institutionen för matematiska vetenskaper, matematisk statistik (2005-2016)

Ämnesområden

Matematik
Matematisk statistik

Chalmers infrastruktur