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Do Institutional Investors Care About The Ambiguity Of Their Assets? Evidence From Portfolio Holdings In Alternative Investments

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  • CHRISTIAN KOZIOL

    (University of Hohenheim, D-70593 Stuttgart, Germany)

  • JULIANE PROELSS

    (WHU — Otto Beisheim School of Management, D-56179 Vallendar, Germany)

  • DENIS SCHWEIZER

    (WHU — Otto Beisheim School of Management, D-56179 Vallendar, Germany)

Abstract

In this paper, we analyze whether model risk/asset-specific ambiguity is an issue for institutional investors. For this purpose, we first show how model risk (which turns out to be equivalent to special cases of ambiguity) affects optimal portfolio allocation. Using average portfolio holdings for traditional and alternative asset classes of 119 institutional investors, we then calibrate our model to implicitly determine the ambiguity factors of different asset classes. We find that institutional investors are strongly ambiguity-averse, as documented by a Sharpe ratio that is only 60 percent that of an (unambiguous) efficient portfolio. In line with intuition, we document that equity and bond portfolios have a rather low ambiguity, while alternative investments such as real estate, private equity, and hedge fund investments exhibit a very high ambiguity. These results are robust with regard to the size of the expected returns supposed by the investors.

Suggested Citation

  • Christian Koziol & Juliane Proelss & Denis Schweizer, 2011. "Do Institutional Investors Care About The Ambiguity Of Their Assets? Evidence From Portfolio Holdings In Alternative Investments," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(04), pages 465-484.
    • Handle: RePEc:wsi:ijtafx:v:14:y:2011:i:04:n:s0219024911006693
    DOI: 10.1142/S0219024911006693
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    Cited by:

    1. Juliane Proelss & Denis Schweizer, 2014. "Polynomial goal programming and the implicit higher moment preferences of US institutional investors in hedge funds," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(1), pages 1-28, February.
    2. Horváth, Ferenc, 2017. "Essays on robust asset pricing," Other publications TiSEM e54d7b33-1f27-4b0e-9f84-f, Tilburg University, School of Economics and Management.

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