Portfolio Optimization with Nondominated Priors and Unbounded Parameters
classification
🧮 math.OC
q-fin.PM
keywords
volatilitymaximizationmeanunboundedutilityassumefollowingknightian
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We consider classical Merton problem of terminal wealth maximization in finite horizon. We assume that the drift of the stock is following Ornstein-Uhlenbeck process and the volatility of it is following GARCH(1) process. In particular, both mean and volatility are unbounded. We assume that there is Knightian uncertainty on the parameters of both mean and volatility. We take that the investor has logarithmic utility function, and solve the corresponding utility maximization problem explicitly. To the best of our knowledge, this is the first work on utility maximization with unbounded mean and volatility in Knightian uncertainty under nondominated priors.
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