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Robust Forward Investment and Consumption under Drift and Volatility Uncertainties: A Randomization Approach

Year: 2025

Type: article

Abstract: . This paper studies robust forward investment and consumption preferences and optimal strategies for a risk-averse and ambiguity-averse agent in an incomplete financial market with drift and volatility uncertainties. We focus on nonzero volatility and constant relative risk aversion forward preferences. Given the nonconvexity of the Hamiltonian with respect to uncertain volatilities, we first construct robust randomized forward preferences through endogenous randomization in an auxiliary market. Therein, we derive the corresponding optimal and robust investment and consumption strategies. Furthermore, we show that such forward preferences and strategies, developed in the auxiliary market, remain optimal and robust in the physical market, offering a comprehensive analysis for forward investment and consumption under model uncertainty.

Source: SIAM Journal on Financial Mathematics

DOI: 10.1137/24m1699140

Authors: Wing Fung Chong, Gechun Liang

Institutions: University of Hong Kong, University of Warwick

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funder: National Natural Science Foundation of China

Award: G6076520351