Robust time-inconsistent stochastic linear-quadratic control with drift disturbance

This paper studies stochastic linear-quadratic control with a time-inconsistent objective and worst-case drift disturbance. We allow the agent to introduce disturbances to reflect her uncertainty about the drift coefficient of the controlled state process. We adopt a two-step equilibrium control app...

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Bibliographic Details
Main Authors: Han, Bingyan, Pun, Chi Seng, Wong, Hoi Ying
Other Authors: School of Physical and Mathematical Sciences
Format: Article
Language:English
Published: 2022
Subjects:
Online Access:https://hdl.handle.net/10356/163191
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Institution: Nanyang Technological University
Language: English
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Summary:This paper studies stochastic linear-quadratic control with a time-inconsistent objective and worst-case drift disturbance. We allow the agent to introduce disturbances to reflect her uncertainty about the drift coefficient of the controlled state process. We adopt a two-step equilibrium control approach to characterize the robust time-consistent controls, which can preserve the order of preference. Under a general framework allowing random parameters, we derive a sufficient condition for equilibrium controls using the forward-backward stochastic differential equation approach. We also provide analytical solutions to mean-variance portfolio problems for various settings. Our empirical studies confirm the improvement in portfolio’s performance in terms of out-of-sample Sharpe ratio by incorporating with robustness.