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On the Robust Merton Problem with Nondominated Priors

Kerem Ugurlu (keremugurlu***at***gmail.com)

Abstract: We give explicit solutions for utility optimization 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 penalization term. We solve the robust optimization problem explicitly both when the investor's utility is of CRRA and of CARA type. We show that our problem formulation allows us to apply Sion's $\min\max$ theorem.The prior belief results in non-corner solution, which is different from the usual results in a robust optimization problem.

Keywords: Knightian uncertainty; Robust optimization

Category 1: Applications -- OR and Management Sciences (Finance and Economics )


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Entry Submitted: 06/03/2017
Entry Accepted: 06/04/2017
Entry Last Modified: 01/01/2018

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