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Learning, Ambiguity and Life-Cycle Portfolio Allocation

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  • Claudio Campanale

    (University of Alicante)

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    Abstract

    In the present paper I develop a life-cycle portfolio choice model where agents perceive stock returns to be ambiguous and are ambiguity averse. As in Epstein and Schneider (2005) part of the ambiguity vanishes over time as a consequence of learning over observed returns. The model shows that ambiguity alone can rationalize moderate stock market participation rates and conditional shares with reasonable participation costs but has strongly counterfactual implications for conditional allocations to stocks by age and wealth. When learning is allowed, conditional shares over the life-cycle are instead aligned with the empirical evidence and patterns of stock holdings over the wealth distribution get closer to the data. (Copyright: Elsevier)

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    File URL: http://dx.doi.org/10.1016/j.red.2009.09.002
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    Bibliographic Info

    Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

    Volume (Year): 14 (2011)
    Issue (Month): 2 (April)
    Pages: 339-367

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    Handle: RePEc:red:issued:09-54

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    Related research

    Keywords: Portfolio choice; Life-cycle; Ambiguity; Learning;

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    References

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    Cited by:
    1. Jayant Ganguli & Scott Condie & Philipp Karl Illeditsch, 2012. "Information Inertia," Economics Discussion Papers 719, University of Essex, Department of Economics.
    2. Hui Chen & Nengjiu Ju & Jianjun Miao, 2008. "Dynamic Asset Allocation with Ambiguous Return Predictability," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-179, Boston University - Department of Economics, revised Feb 2009.
    3. Massimo Guidolin & Hening Liu, 2013. "Ambiguity Aversion and Under-diversification," Working Papers 483, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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