Dynamic portfolio selection under ambiguity in the ε -contaminated binomial model

Abstract

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 ε-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 ε on the optimal portfolio.