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Worst-case portfolio optimization in discrete time

: Chen, L.; Korn, R.


Mathematical methods of operations research 90 (2019), Nr.2, S.197-227
ISSN: 1432-2994
ISSN: 0340-9422
Fraunhofer ITWM ()

We consider discrete-time portfolio problems of an investor when taking the possibility of market crashes into account. In the case of the logarithmic utility function, we construct the worst-case optimal portfolio strategy by an indifference principle. Then, we extend the setting to general utility functions and derive the worst-case optimal portfolio processes via the characterization by a dynamic programming equation. Furthermore, we numerically examine the convergence behavior of the discrete-time worst-case optimal portfolio processes for the choice of popular utility functions when the time between two possible price changes tends to zero.