Utility Maximization under Model Uncertainty

When modelling financial markets one is often confronted with model uncertainty in the sense that parameters of the model or the distributions of some factors in the model are only known up to a certain degree. Expert opinions... [ view full abstract ]

When modelling financial markets one is often confronted with model uncertainty in the sense that parameters of the model or the distributions of some factors in the model are only known up to a certain degree. Expert opinions can help towards reducing this uncertainty in a market with Gaussian drift.

In a more general setting, we investigate how optimal trading strategies for a utility maximization problem behave, when the degree of model uncertainty increases. If uncertainty exceeds a certain threshold simple strategies such as uniform portfolio diversification outperform more sophisticated ones due to being more robust.