Ergodic robust maximisation of asymptotic growth with stochastic factor processes
David Itkin, B. Koch, Martin Larsson, Josef Teichmann
Abstract
<jats:p> We consider a robust asymptotic growth problem under model uncertainty in the presence of stochastic factors. We fix two inputs representing the instantaneous covariance for the asset price process <jats:inline-formula> <jats:alternatives> <jats:tex-math>$X$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>X</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> , which depends on an additional stochastic factor process <jats:inline-formula> <jats:alternatives> <jats:tex-math>$Y$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>Y</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> , as well as the invariant joint density of <jats:inline-formula> <jats:alternatives> <jats:tex-math>$X$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>X</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> and <jats:inline-formula> <jats:alternatives> <jats:tex-math>$Y$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>Y</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> . The factor process <jats:inline-formula> <jats:alternatives> <jats:tex-math>$Y$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>Y</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> has continuous trajectories, but is not required to be a semimartingale. Our setup allows drift uncertainty in <jats:inline-formula> <jats:alternatives> <jats:tex-math>$X$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>X</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> and model uncertainty for the local dynamics of <jats:inline-formula> <jats:alternatives> <jats:tex-math>$Y$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>Y</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> . This work builds on a recent paper of Kardaras and Robertson [20], where the authors consider an analogous problem but without the additional factor process. Under suitable, quite weak assumptions, we are able to characterise the robust optimal trading strategy and the robust optimal growth rate. The optimal strategy is shown to be functionally generated and, remarkably, does not depend on the factor process <jats:inline-formula> <jats:alternatives> <jats:tex-math>$Y$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>Y</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> . Our result provides a comprehensive answer to a question proposed by Fernholz in 2002. We also show that the optimal strategy remains optimal even in the more restricted case where <jats:inline-formula> <jats:alternatives> <jats:tex-math>$Y$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>Y</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> is a semimartingale and the joint covariation structure of <jats:inline-formula> <jats:alternatives> <jats:tex-math>$X$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>X</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> and <jats:inline-formula> <jats:alternatives> <jats:tex-math>$Y$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>Y</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> is prescribed as a function of <jats:inline-formula> <jats:alternatives> <jats:tex-math>$X$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>X</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> and <jats:inline-formula> <jats:alternatives> <jats:tex-math>$Y$</jats:tex-math> <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"> <mml:mi>Y</mml:mi> </mml:math> </jats:alternatives> </jats:inline-formula> . Our results are obtained using a combination of techniques from partial differential equations, calculus of variations and generalised Dirichlet forms. </jats:p>
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