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Robust portfolio choice with uncertainty about jump and diffusion risk

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  • Branger, Nicole
  • Larsen, Linda Sandris

Abstract

We analyze the portfolio planning problem of an ambiguity averse investor. The stock follows a jump-diffusion process. We find that there are pronounced differences between ambiguity aversion with respect to diffusion risk and jump risk. Ignoring ambiguity with respect to jump risk causes larger losses in an incomplete market, whereas ignoring ambiguity with respect to diffusion risk is more severe in a complete market. For a deterministic jump size we show that the loss from market incompleteness is always increasing in the level of ambiguity aversion with respect to one risk factor and decreasing in the level of ambiguity aversion with respect to the other risk factor.

Suggested Citation

  • Branger, Nicole & Larsen, Linda Sandris, 2013. "Robust portfolio choice with uncertainty about jump and diffusion risk," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5036-5047.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5036-5047
    DOI: 10.1016/j.jbankfin.2013.08.023
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    References listed on IDEAS

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    More about this item

    Keywords

    Ambiguity; Jump-diffusion model; Robust control; Utility loss; Market completeness;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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