Optimal decision under ambiguity for diffusion processes
Computational Finance
2015-03-19 v2 Optimization and Control
Probability
Portfolio Management
Abstract
In this paper we consider stochastic optimization problems for an ambiguity averse decision maker who is uncertain about the parameters of the underlying process. In a first part we consider problems of optimal stopping under drift ambiguity for one-dimensional diffusion processes. Analogously to the case of ordinary optimal stopping problems for one-dimensional Brownian motions we reduce the problem to the geometric problem of finding the smallest majorant of the reward function in a two-parameter function space. In a second part we solve optimal stopping problems when the underlying process may crash down. These problems are reduced to one optimal stopping problem and one Dynkin game. Examples are discussed.
Cite
@article{arxiv.1110.3897,
title = {Optimal decision under ambiguity for diffusion processes},
author = {Sören Christensen},
journal= {arXiv preprint arXiv:1110.3897},
year = {2015}
}