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Preprint 11-2004

Optimal investments for robust utility functionals in complete market models

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Author(s) : Alexander Schied

Preprint series of the Institute of Mathematics, Technische Universität Berlin
Preprint 11-2004

MSC 2000

91B28 Finance, portfolios, investment

Abstract :
We introduce a systematic approach to the problem of maximizing the robust utility of the terminal wealth of an admissible strategy in a general complete market model, where the robust utility functional is defined by a set $\cQ$ of probability measures. Our main result shows that this problem can be reduced to determining a "least favorable" measure $Q_0\in\cQ$, which is universal in the sense that it does not depend on the particular utility function. The robust problem is thus equivalent to a standard utility maximization problem with respect to the "subjective" probability measure $Q_0$. By using the Huber-Strassen theorem from robust statistics, it is shown that $Q_0$ always exists if $\cQ$ is the core of a 2-alternating upper probability. We also discuss the problem of robust utility maximization with uncertain drift in a Black-Scholes market and the case of "weak information" as studied by Baudoin (2002).

Keywords : robust utility maximization, financial markets, Radon-Nikodym derivative of capacities

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