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Optimal portfolio under ambiguous ambiguity

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  • Makarov, Dmitry

Abstract

A prominent approach to modelling ambiguity about stock return distribution is to assume that investors have multiple priors about the distribution and these priors are distributed according to a certain second-order distribution. Realistically, investors may also have multiple priors about the second-order distribution, thus allowing for ambiguous ambiguity. Despite a long history of debates about this idea (Reichenbach, 1949; Savage, 1954), there seems to be no formal analysis of investment behavior in the presence of this feature. We develop a tractable portfolio choice framework incorporating ambiguous ambiguity, characterize analytically the optimal portfolio, and examine its properties.

Suggested Citation

  • Makarov, Dmitry, 2021. "Optimal portfolio under ambiguous ambiguity," Finance Research Letters, Elsevier, vol. 43(C).
    • Handle: RePEc:eee:finlet:v:43:y:2021:i:c:s1544612321000428
    DOI: 10.1016/j.frl.2021.101961
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