Ambiguity made easier
AbstractIn this paper we review some well-known simple models for portfolio selection under Knightian uncertainty, also known as ambiguity, and we compute a number of explicit optimal portfolio rules using elementary mathematical tools. In the case of a single period financial market, new results arise for an agent who is risk neutral and smoothly ambiguity averse, for a loss averse and smoothly ambiguity averse agent, for a Mean-Variance and alpha-Maxmin Expected Utility agent. In a continuous time setting, we are able to recover some existing results on optimal investment strategies employing trivial stochastic analysis and avoiding the complicated BSDE machinery.
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Bibliographic InfoPaper provided by Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze in its series DiMaD Working Papers with number 2011-07.
Length: 11 pages
Date of creation: Apr 2011
Date of revision:
Knightian uncertainty; Maxmin Expected Utility; smooth ambiguity aversion; loss aversion;
Find related papers by JEL classification:
- 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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