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Ambiguity and optimal portfolio choice with Value-at-Risk constraint

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  • Jang, Bong-Gyu
  • Park, Seyoung

Abstract

Integrating a Value-at-Risk constraint on a fund manager’s wealth and ambiguity, we present a model of optimal portfolio choice for a fund manager who allocates her wealth between risky and riskless assets. When a fund manager controls asset composition, her reactions differ with respect to an increase in only risk aversion and only ambiguity aversion. When the sum of coefficients of risk aversion and ambiguity aversion is fixed, the effect of risk aversion on risky investment dominates the effect of ambiguity aversion in that stock holdings are dramatically smaller in the absence of ambiguity aversion than in its presence.

Suggested Citation

  • Jang, Bong-Gyu & Park, Seyoung, 2016. "Ambiguity and optimal portfolio choice with Value-at-Risk constraint," Finance Research Letters, Elsevier, vol. 18(C), pages 158-176.
    • Handle: RePEc:eee:finlet:v:18:y:2016:i:c:p:158-176
    DOI: 10.1016/j.frl.2016.04.013
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    More about this item

    Keywords

    Ambiguity aversion; Risk aversion; Value-at-Risk (VaR); Optimal portfolio; Wealth management;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • 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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