We present a robust version of the life-cycle optimal portfolio choice problem in the presence of labor income, as introduced in Biffis, Gozzi and Prosdocimi and Dybvig and Liu. In particular, in the influence of past wages on the future ones is modelled linearly in the evolution equation of labor income, through a given weight function. The optimisation relies on the resolution of an infinite dimensional HJB equation. We improve the state of art in three ways. First, we allow the weight to be a Radon measure. This accommodates for more realistic weighting of the sticky wages, like, e.g., on a discrete temporal grid according to some periodic income. Second, there is a general correlation structure between labor income and stocks market. This naturally affects the optimal hedging demand, which may increase or decrease according to the correlation sign. Third, we allow the weight to change with time, possibly lacking perfect identification. The uncertainty is specified by a given set of Radon measures K, in which the weight process takes values. This renders the inevitable uncertainty on how the past affects the future, and includes the standard case of error bounds on a specific estimate for the weight. Under uncertainty averse preferences, the decision maker takes a maxmin approach to the problem. Our analysis confirms the intuition: in the infinite dimensional setting, the optimal policy remains the best investment strategy under the worst case weight.

Robust portfolio choice with sticky wages / Biagini, Sara; Gozzi, Fausto; Zanella, Margherita. - In: SIAM JOURNAL ON FINANCIAL MATHEMATICS. - ISSN 1945-497X. - 13:3(2022), pp. 1-40. [10.1137/21M1429722]

Robust portfolio choice with sticky wages

Sara Biagini
;
Fausto Gozzi;
2022

Abstract

We present a robust version of the life-cycle optimal portfolio choice problem in the presence of labor income, as introduced in Biffis, Gozzi and Prosdocimi and Dybvig and Liu. In particular, in the influence of past wages on the future ones is modelled linearly in the evolution equation of labor income, through a given weight function. The optimisation relies on the resolution of an infinite dimensional HJB equation. We improve the state of art in three ways. First, we allow the weight to be a Radon measure. This accommodates for more realistic weighting of the sticky wages, like, e.g., on a discrete temporal grid according to some periodic income. Second, there is a general correlation structure between labor income and stocks market. This naturally affects the optimal hedging demand, which may increase or decrease according to the correlation sign. Third, we allow the weight to change with time, possibly lacking perfect identification. The uncertainty is specified by a given set of Radon measures K, in which the weight process takes values. This renders the inevitable uncertainty on how the past affects the future, and includes the standard case of error bounds on a specific estimate for the weight. Under uncertainty averse preferences, the decision maker takes a maxmin approach to the problem. Our analysis confirms the intuition: in the infinite dimensional setting, the optimal policy remains the best investment strategy under the worst case weight.
2022
Robust optimization, Merton problem, sticky wages, stochastic delayed equations, uncertainty, infinite dimensional Hamilton-Jacobi-Bellman.
Robust portfolio choice with sticky wages / Biagini, Sara; Gozzi, Fausto; Zanella, Margherita. - In: SIAM JOURNAL ON FINANCIAL MATHEMATICS. - ISSN 1945-497X. - 13:3(2022), pp. 1-40. [10.1137/21M1429722]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11385/217637
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