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ImpliedAmbiguity:Mean-Variance Efficiency andPricingErrors

Author

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  • Chiaki Hara

    (Institute of Economic Research, Kyoto University)

  • Toshiki Honda

    (Graduate School of Business Administration, Department of Business Administration, Hitotsubashi University)

Abstract

We study the optimal portfolio choice problem for an ambiguity-averse investor having a utility function of the form of Klibanoff, Marinacci, and Mukerji (2005) and Maccheroni, Marinacci, and Ruffino (2013). We identify necessary and sufficient conditions for a given portfolio to be optimal for some ambiguity-averse investor. We also show that the smallest ambiguity aversion coefficient for the optimality of the given portfolio, which we term the implied ambiguity of the portfolio, is decreasing with respect to its Sharpe ratio. This relation can also be expressed in terms of the size of the pricing errors when the asset returns are regressed on the return of the portfolio. A numerical analysis is provided to find the ambiguity aversion implied by the U.S. equity market data.

Suggested Citation

  • Chiaki Hara & Toshiki Honda, 2018. "ImpliedAmbiguity:Mean-Variance Efficiency andPricingErrors," KIER Working Papers 1004, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1004
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP1004.pdf
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    References listed on IDEAS

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    2. Fabio Maccheroni & Massimo Marinacci & Doriana Ruffino, 2013. "Alpha as Ambiguity: Robust Mean‐Variance Portfolio Analysis," Econometrica, Econometric Society, vol. 81(3), pages 1075-1113, May.
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    Cited by:

    1. Chiaki Hara, 2020. "A Ranking over "More Risk Averse Than" Relations and its Application to the Smooth Ambiguity Model," KIER Working Papers 1019, Kyoto University, Institute of Economic Research.
    2. Makarov, Dmitry, 2021. "Optimal portfolio under ambiguous ambiguity," Finance Research Letters, Elsevier, vol. 43(C).

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    More about this item

    Keywords

    Ambiguityaversion; optimalportfolio; Sharperatio; beta; alpha; mutualfundtheorem.;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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