Robust control and recursive utility

This paper shows that a finite-horizon version of the robust control criterion appearing in recent papers by Hansen, Sargent, and their coauthors can be described as recursive utility, which in continuous time takes the form of the Stochastic Differential Utility (SDU) of Duffie and Epstein (1992). While it has previously been noted that Bellman equations arising in robust control settings are of the same form as Bellman equations arising from SDU maximization, here this connection is shown directly without reference to any underlying dynamics, or Markov structure.

Authors and Affiliations

1. Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, USA (e-mail: c-skiadas@kellogg.northwestern.edu) , , , , , , US

   Costis Skiadas

Manuscript received: July 2002; final version received: November 2002

The paper has benefited from discussions with Ali Lazrak, Hong Liu, Lars Hansen, Larry Epstein, and Mark Schroder. Any errors are my own. The latest version of this paper is available at http://www.kellogg.nwu.edu/faculty/skiadas/home.htm.

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