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
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2002
Published in:
- Computational methods in decision-making, economics and finance. - 2002, no. 109
Financial equilibrium
Merton’s model
Model misspecification
Perturbation theory
Robust decision making
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
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- English
- Classification
- Economics
- License
- License undefined
- Identifiers
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- RERO DOC 5386
- ARK ark:/12658/srd1318032
- Persistent URL
- https://n2t.net/ark:/12658/srd1318032
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