English, Article edition: UNCERTAINTY AVERSION, ROBUST CONTROL AND ASSET HOLDINGS WITH A STOCHASTIC INVESTMENT OPPORTUNITY SET GIANNIS VARDAS; ANASTASIOS XEPAPADEAS

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Bookmark: http://trove.nla.gov.au/version/83228
Physical Description
  • article
Language
  • English

Edition details

Title
  • UNCERTAINTY AVERSION, ROBUST CONTROL AND ASSET HOLDINGS WITH A STOCHASTIC INVESTMENT OPPORTUNITY SET
Author
  • GIANNIS VARDAS
  • ANASTASIOS XEPAPADEAS
Physical Description
  • article
Notes
  • We formulate the portfolio choice problem as a robust control problem under uncertainty or ambiguity aversion. By considering a stochastic investment opportunity set, we derive optimal robust portfolio rules in the cases of one and two risky assets. With two risky assets and ambiguity structure determined by economy-wide factors, we show that the robust portfolio rule could lead to an increase in the total holdings of risky assets as compared to the holdings under the Merton rule, which is the standard risk aversion case. This result goes against the general belief that uncertainty aversion and robust control methods lead to conservative behavior. We also show that the investor is more likely to increase the holdings of the asset for which there is no ambiguity, and reduce the holdings of the asset for which there is ambiguity, a result that might provide an explanation for the home bias puzzle.
  • Uncertainty aversion, model misspecification, robust control, portfolio choice models
  • RePEc:wsi:ijtafx:v:10:y:2007:i:06:p:985-1014
Language
  • English
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