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Robust portfolio choice with stochastic factors and market frictions
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DOI：10.1016/j.automatica.2026.113033.png)
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Abstract
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This paper examines a robust portfolio choice problem in continuous time, where asset returns are influenced by stochastic factors and subject to both temporary and permanent price impacts. The investor, exhibiting ambiguity aversion towards estimation errors in asset returns and predictive factors, aims to maximize a local mean–variance preference, net of price impact costs. We formulate the investor’s optimization problem as a risk-sensitive control problem and characterize its solution through a coupled system of matrix Riccati differential equations. The inclusion of permanent price impact complicates the solvability of the coupled system. Nevertheless, we successfully establish the well-posedness of the coupled system both locally and globally, relying solely on sufficient conditions based on the model parameters. Finally, we present numerical examples to illustrate the effects of price impacts, ambiguity aversion, and distortion resilience on the investor’s robust trading strategy, along with simulation results showing improvements in the net Sharpe ratio across various scenarios.
Keywords:
Robust portfolio choice
Stochastic factors
Price impact
Ambiguity aversion
Risk-sensitive control
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5.9
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1.1W
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5.2W
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