Advanced Search
MyIDEAS: Login

Taking Ambiguity to Reality: Robust Agents Cannot Trust the Data Too Much

Contents:

Author Info

  • Fabio TROJANI

    (University of Lugano and Swiss Finance Institute)

  • Christian WIEHENKAMP

    (Goethe University Frankfurt)

  • Jan WRAMPELMEYER

    (University of Zurich and Swiss Finance Institute (SFI PhD Program))

Abstract

Ambiguity aversion in dynamic models is motivated by the presence of unknown time-varying features, which agents do not understand and cannot theorize about. We analyze the consequences of this assumption for economic agents and model builders, who typically need to estimate a model, e.g., to implement optimal robust decision rules or to quantify the equilibrium price of ambiguity. We show that in such contexts robust estimation methods are essential for (i) limiting the sensitivity of robust policies to abnormal time-varying features and (ii) drawing coherent inference on equilibrium variables. We propose a general robust estimation methodology, applicable to many economic settings of ambiguity. In the robust portfolio problem, unknown time-varying features in expected returns or rare events generate large utility losses, which are successfully bounded by our robust approach. Time-varying features can also produce large biases in estimated equilibrium risk or ambiguity premia, while in incomplete derivative markets they tend to systematically produce overestimated bid-ask spreads. We show that a good fraction of these biases can be eliminated, using our robust estimation approach. Finally, in a real-data application with ambiguous predictability our robust approach consistently produces both portfolio weights largely insensitive to abnormal data constellations and larger out-of-sample utilities.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1668569
Our checks indicate that this address may not be valid because: 503 Service Unavailable. If this is indeed the case, please notify (Marilyn Barja)
Download Restriction: no

Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 11-33.

as in new window
Length: 82 pages
Date of creation:
Date of revision:
Handle: RePEc:chf:rpseri:rp1133

Contact details of provider:
Web page: http://www.SwissFinanceInstitute.ch
More information through EDIRC

Related research

Keywords: Ambiguity Aversion; Knightian Uncertainty; Robust Econometrics; Portfolio Choice; Option Pricing;

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp1133. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.