Robust Bond Investment Strategies under Parameter Uncertainty

 This thesis investigates how parameter uncertainty in interest-rate dynamics affects optimal portfolio allocations to nominal bonds. While bonds can hedge declines in returns on bank deposits when interest rates fall, this benefit relies on parameter estimates that are difficult to determine precisely. The thesis demonstrates that small misspecifications in key parameters—such as mean reversion or feedback effects—can lead to significant wealth and utility losses for investors. To address this vulnerability, it analyses robust investment strategies that remain effective even when true market parameters differ from initial estimates. Across three chapters, the thesis first shows how incorrect assumptions can harm portfolio performance and highlights simple strategies that reduce sensitivity to estimation errors. It then applies robust control methods to derive max-min strategies that guard against worst-case scenarios. Finally, it incorporates potential climate-related impacts on interest rates, examining uncertainty in climate risk factors and proposing robust allocations that help protect long-term investors from both economic and climate-driven parameter risks. 

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