Markov decision processes with recursive risk measures

In this paper, we consider risk-sensitive Markov Decision Processes (MDPs) with Borel state and action spaces and unbounded cost under both finite and infinite planning horizons. Our optimality criterion is based on the recursive application of static risk measures. This is motivated by recursive utilities in the economic literature, has been studied before for the entropic risk measure and is extended here to an axiomatic characterization of suitable risk measures. We derive a Bellman equation and prove the existence of Markovian optimal policies. For an infinite planning horizon, the model is shown to be contractive and the optimal policy to be stationary. Moreover, we establish a connection to distributionally robust MDPs, which provides a global interpretation of the recursively defined objective function. Monotone models are studied in particular.