Robust forward investment and consumption under drift and volatility uncertainties: A randomization approach
Authors: Wing Fung Chong, Gechun Liang
Abstract: This paper studies robust forward investment and consumption preferences and optimal strategies for a risk-averse and ambiguity-averse agent in an incomplete financial market with drift and volatility uncertainties. We focus on non-zero volatility and constant relative risk aversion (CRRA) forward preferences. Given the non-convexity of the Hamiltonian with respect to uncertain volatilities, we first construct robust randomized forward preferences through endogenous randomization in an auxiliary market. We derive the corresponding optimal and robust investment and consumption strategies. Furthermore, we show that such forward preferences and strategies, developed in the auxiliary market, remain optimal and robust in the physical market, offering a comprehensive framework for forward investment and consumption under model uncertainty.
Explore the paper tree
Click on the tree nodes to be redirected to a given paper and access their summaries and virtual assistant
Look for similar papers (in beta version)
We compare the title and abstract with papers indexed in our database. For arXiv papers, we search within the same category; for DOI and other sources, we search across sources and subjects. You can rerun the search as our database grows.