Ambiguity Overprecision and Optimal Capital Requirements in Continuous Time

We develop a dynamic utility model within a continuous-time framework to incorporate ambiguity overprecision regarding both the correlation and drift of price dynamics. We extend key results from optimal capital requirements theory in this framework. By employing an explicit approach, we determine the optimal liability-to-surplus ratio for a major insurer, shedding light on the profound impact of ambiguity overprecision. Our analysis reveals that accounting for ambiguity overprecision leads to an optimal liability-to-surplus ratio exceeding the benchmark established in the absence of such overprecision.