A review of perturbative approaches for robust optimal portfolio problems

Trojani, Fabio; Vanini, Paolo

Back

Book chapter

A review of perturbative approaches for robust optimal portfolio problems

Trojani, Fabio Istituto di finanza (IFin), Facoltà di scienze economiche, Università della Svizzera italiana, Svizzera
Vanini, Paolo Istituto di finanza (IFin), Facoltà di scienze economiche, Università della Svizzera italiana, Svizzera

2002

Published in:

Computational methods in decision-making, economics and finance. - Dordrecht : Kluwer. - 2002, no. 109

English Only a few intertemporal optimal consumption and portfolio problems in partial and general equilibrium can be solved explicitly. It is illustrated in the paper that perturbation theory is a powerful tool for deriving approximate analytical solutions for the desired optimal policies in problems where general state dynamics are admitted and a preference for robustness is present. Starting from the perturbative approach proposed recently by Kogan and Uppal it is demonstrated how robust equilibria for some formulations of a preference for robustness in the literature can be solved. A crucial requirement for this approach is the existence of a known functional form for the candidate model solutions, a condition which is not satisfied by some models of a preference for robustness. For these cases, recent results by Trojani and Vanini can be used to obtain a perturbative solution to the Bellman equation of the relevant benchmark model and to give some formal conditions under which the perturbative solution converges to the correct one.

Language