Portfolio optimization with choice of a probability measure

Abstract

This paper considers a new problem for portfolio optimization with a choice of a probability measure, particularly optimal investment problem under sentiments. Firstly, we formulate the problem as a sup-sup-inf problem consisting of optimal investment and a choice of a probability measure expressing aggressive and conservative attitudes of the investor. This problem also includes the case where the agent has conservative and neutral views on risks represented by Brownian motions and degrees of conservativeness differ among the risk. Secondly, we obtain an expression of the volatility process of a backward stochastic differential equation related to the conservative sentiment in order to investigate cases where the sup-sup-inf problem is solved. Specifically, we take a Malliavin calculus approach to solve the problem and obtain an optimal portfolio process. Finally, we provide an expression of the optimal portfolio under the sentiments in two examples with stochastic uncertainties in an exponential utility case and investigate the impact of the sentiments on the portfolio process.