Robust consumption and portfolio policies when asset prices can jump

Yacine Aït-Sahalia, Felix Matthys

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

We study the consumption-portfolio allocation problem in continuous time when asset prices follow Lévy processes and the investor is concerned about potential model misspecification. We derive optimal consumption and portfolio policies that are robust to uncertainty about the hard-to-estimate drift rate, jump intensity and jump size parameters. We also provide a semi-closed form formula for the detection-error probability and compare various portfolio holding strategies, including robust and non-robust policies. Our quantitative analysis shows that ignoring uncertainty leads to significant wealth loss for the investor.

Original languageEnglish (US)
Pages (from-to)1-56
Number of pages56
JournalJournal of Economic Theory
Volume179
DOIs
StatePublished - Jan 2019

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Jumps
  • Lévy processes
  • Optimal consumption and portfolio selection
  • Robust control

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