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Horizon-unbiased investment with ambiguity

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  • Lin, Qian
  • Sun, Xianming
  • Zhou, Chao

Abstract

In the presence of ambiguity about the driving force of market randomness, we consider a dynamic portfolio choice problem without any predetermined investment horizon. The investment criterion is formulated as a robust forward performance process, reflecting an investor’s dynamic preference adapted to the market evolution. We show that the market risk premium and the utility risk premium jointly determine the investors’ trading direction and the worst-case scenarios of the risky asset’s mean return and volatility. The closed-form solution for the optimal investment strategies is given in the special settings of the constant relative risk aversion (CRRA) preference. The resulting portfolio strategies highlight the effect of ambiguity on nonparticipation in the risky asset market from the forward performance point of view.

Suggested Citation

  • Lin, Qian & Sun, Xianming & Zhou, Chao, 2020. "Horizon-unbiased investment with ambiguity," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:dyncon:v:114:y:2020:i:c:s0165188920300646
    DOI: 10.1016/j.jedc.2020.103896
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    References listed on IDEAS

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    Cited by:

    1. Daniel Bartl & Michael Kupper & Ariel Neufeld, 2021. "Duality theory for robust utility maximisation," Finance and Stochastics, Springer, vol. 25(3), pages 469-503, July.
    2. Lin, Qian & Luo, Yulei & Sun, Xianming, 2022. "Robust investment strategies with two risky assets," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    3. Ariel Neufeld & Julian Sester & Mario Šikić, 2023. "Markov decision processes under model uncertainty," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 618-665, July.
    4. Daniel Bartl & Michael Kupper & Ariel Neufeld, 2020. "Duality Theory for Robust Utility Maximisation," Papers 2007.08376, arXiv.org, revised Jun 2021.

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    More about this item

    Keywords

    Ambiguity; Forward performance; Robust investment; Risk premium; Nonparticipation;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • 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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