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The Robust Merton Problem of an Ambiguity Averse Investor

23 February 2016 at 12:00 PM - 1:30 PM

Room 207, Campus on Viale Romania, 32

Speaker: Sara Biagini, LUISS

Abstract: We derive a closed form portfolio optimization rule for an investor who is diffident about mean return and volatility estimates, and has a CRRA utility. The novelty is that confidence is here represented using ellipsoidal uncertainty sets for the drift, given a volatility realization.This specification affords a simple and concise analysis, as the optimal portfolio allocation policy is shaped by a rescaled market Sharpe ratio, computed under the worst case volatility. The result is based on a max-min Hamilton-Jacobi-Bellman-Isaacs PDE, which extends the classical Merton problem and reverts to it for an ambiguity-neutral investor. 

Based on a joint work with M. Pinar, Bilkent.