Ambiguity, Risk and Portfolio Choice under Incomplete Information
AbstractThis paper studies optimal consumption and portfolio choice in a Mertonstyle model with incomplete information when there is a distinction between ambiguity and risk. The latter distinction is afforded by adoption of recursive multiple-priors utility. The fundamental issues are: (i) How does the agent optimally estimate the unobservable processes as new information arrives over time? (ii) What are the effects of ambiguity and incomplete information on behavior? This paper shows that it is optimal to first use any prior to perform Bayesian estimation and then to maximize expected utility with that prior based on the resulting estimates. Finally, the paper shows that a hedging demand arises that is affected by both ambiguity and estimation risk.
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Bibliographic InfoArticle provided by Society for AEF in its journal Annals of Economics and Finance.
Volume (Year): 10 (2009)
Issue (Month): 2 (November)
Ambiguity; Recursive multiple-priors utility; Incomplete information; Portfolio choice; Hedging; Estimation risk;
Other versions of this item:
- Jianjun Miao, . "Ambiguity, Risk and Portfolio Choice under Incomplete Information," Boston University - Department of Economics - Working Papers Series wp2009-019, Boston University - Department of Economics.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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