Dynamic Portfolio Selection Under Ambiguity in the [Formula: see text]-Contaminated Binomial Model

Antonini, Paride; Petturiti, Davide; Vantaggi, Barbara

Investors often need to look for an optimal portfolio acting under ambiguity, as they may not be able to single out a unique real-world probability measure. In this paper a discrete-time dynamic portfolio selection problem is studied, referring to an [Formula: see text]-contaminated binomial market model and assuming investors’ preferences are consistent with the Choquet expected utility theory. We formulate the portfolio selection problem for a CRRA utility function in terms of the terminal wealth, and provide a characterization of the optimal solution in the case stock price returns are uniformly distributed. In this case, we further investigate the effect of the contamination parameter [Formula: see text] on the optimal portfolio.