Robust Bayesian Portfolio Optimization with Discrepancy-based Posterior Ambiguity

Abstract: We study a continuous-time robust Bayesian portfolio optimization problem under drift uncertainty of risky assets. The investor learns unknown asset drifts through Bayesian filtering while considering uncertainty around posterior estimates via discrepancy-based ambiguity sets, including Wasserstein and $L^p$ distances. To address the resulting time inconsistency, we introduce a feedback-type ambiguity framework that reformulates ambiguity conditionally on observable states. This leads to a modified Hamilton--Jacobi--Bellman--Isaacs (HJBI) equation characterizing the value function and the optimal strategy. For a semi-explicit solution example, we use the exponential utility to derive a reduced semilinear parabolic PDE and establish existence of classical solutions via a verification theorem.