On the dynamic representation of some time-inconsistent risk measures in a Brownian filtration
arXiv:1608.07498
Abstract
It is well-known from the work of Kupper and Schachermayer that most law-invariant risk measures do not admit a time-consistent representation. In this work we show that in a Brownian filtration the "Optimized Certainty Equivalent" risk measures of Ben-Tal and Teboulle can be computed through PDE techniques, i.e. dynamically. This can be seen as a substitute of sorts whenever they lack time consistency, and covers the cases of conditional value-at-risk and monotone mean-variance. Our method consists of focusing on the convex dual representation, which suggests extending the state space. With this we can obtain a dynamic programming principle and use stochastic control techniques, along with the theory of viscosity solutions, which we must adapt to cover the present singular situation.
Improved version, 28 pages
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