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Uncertainty aversion, robust control and asset holdings

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  • Giannis Vardas
  • Anastasios Xepapadeas

Abstract

Optimal portfolio rules are derived under uncertainty aversion by formulating the portfolio choice problem as a robust control problem, with ambiguity aversion with respect to the joint distribution of assets and the distribution of each risky asset. Robust portfolio rules indicate that the total holdings of risky assets as a proportion of the investor's wealth may increase as compared with the holdings under the Merton rule, which is the standard risk-aversion case. This result departs from the general belief that ambiguity aversion induces conservative behavior. We also show that an investor following optimal robust portfolio rules increases the holdings of the asset for which there is less ambiguity, and reduces the holdings of the asset for which there is more ambiguity, a result that might provide an additional explanation for the home bias puzzle.

Suggested Citation

  • Giannis Vardas & Anastasios Xepapadeas, 2015. "Uncertainty aversion, robust control and asset holdings," Quantitative Finance, Taylor & Francis Journals, vol. 15(3), pages 477-491, March.
  • Handle: RePEc:taf:quantf:v:15:y:2015:i:3:p:477-491
    DOI: 10.1080/14697688.2011.637077
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Anton Bondarev, 2019. "Robust Policy Schemes for Differential R&D Games with Asymmetric Information," Dynamic Games and Applications, Springer, vol. 9(2), pages 391-415, June.
    2. Bondarev, Anton, 2018. "Robust policy schemes for R&D games with asymmetric information," Working papers 2018/01, Faculty of Business and Economics - University of Basel.
    3. E. M. Cervellati & P. Pattitoni & M. Savioli, 2016. "Cognitive Biases and Entrepreneurial Under-Diversification," Working Papers wp1076, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Bondarev, Anton & Krysiak, Frank C., 2017. "Temporary and permanent technology lock-ins in the quality-differentiated Bertrand competition," Working papers 2017/09, Faculty of Business and Economics - University of Basel.
    5. Anton Bondarev & Frank C. Krysiak, 2017. "Robust policy schemes for R&D games with asymmetric information," Working papers 2017/14, Faculty of Business and Economics - University of Basel.
    6. Giannis Vardas & Anastasios Xepapadeas, 2004. "Uncertainty Aversion and Robust Portfolio Choices," Working Papers 0408, University of Crete, Department of Economics.
    7. Horváth, Ferenc, 2017. "Essays on robust asset pricing," Other publications TiSEM e54d7b33-1f27-4b0e-9f84-f, Tilburg University, School of Economics and Management.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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