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Cost-efficient Payoffs under Model Ambiguity

Author
Carole Bernard, Gero Junike, Thibaut Lux, Steven Vanduffel
Date Updated
2022/08/01
Category
q-fin.PM
Date Published
2022/07/06
Date Retrieved
2022/08/01
Description
A payoff that is the cheapest possible in reaching a given target distribution is called cost-efficient. In the presence of ambiguity the distribution of a payoff is no longer known. A payoff is called robust cost-efficient if its worst-case distribution stochastically dominates a target distribution and is the cheapest possible in doing so. We study the link between this notion of "robust cost-efficiency" and the maxmin expected utility setting of Gilboa and Schmeidler, as well as more generally with robust preferences in a possibly non-expected utility setting. We illustrate our study with examples involving uncertainty both on the drift and on the volatility of the risky asset.
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URL
https://arxiv.org/abs/2207.02948
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