Maximum principle for robust utility optimization via Tsallis relative entropy

Abstract

This paper investigates an optimal consumption-investment problem featuring recursive utility via Tsallis relative entropy. We establish a fundamental connection between this optimization problem and a quadratic backward stochastic differential equation (BSDE), demonstrating that the value function is the value process of the solution to this BSDE. Utilizing advanced BSDE techniques, we derive a novel stochastic maximum principle that provides necessary conditions for both the optimal consumption process and terminal wealth. Furthermore, we prove the existence of optimal strategy and analyze the coupled forward-backward system arising from the optimization problem.

30 pages