Robust Merton Problem with Nondominated Priors
Dr. Kerem Ugurlu
Department of Applied Mathematics
University of Washington
Abstract: We give explicit solutions for utility optimisation problems in the presence of Knightian uncertainty in continuous time. We also incorporate the investor’s prior belief about the future distribution of the market via a penalisation term. We solve the robust optimisation problem explicitly both when the investor’s utility is of CRRA and of CARA type. Accounting on the prior belief results in a non-corner solution, which is different from the usual results in a robust optimisation problem.
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