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Optimal Portfolio with Vector Expected Utility

  • Eric André

    ()

    (Aix-Marseille University (Aix-Marseille School of Economics, EHESS & CNRS.)

We study the optimal portfolio selected by an investor who conforms to Siniscalchi (2009)’s Vector Expected Utility’s (VEU) axioms and who is ambiguity averse. To this end, we derive a mean-variance preference generalised to ambiguity from the second-order Taylor-Young expansion of the VEU certainty equivalent. We apply this Mean Variance Variability preference to the static two-assets portfolio problem and deduce asset allocation results which extend the mean-variance analysis to ambiguity in the VEU framework. Our criterion has attractive features: it is axiomatically well-founded and analytically tractable, it is therefore well suited for applications to asset pricing as proved by a novel analysis of the home-bias puzzle with two ambiguous assets.

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File URL: http://www.amse-aixmarseille.fr/sites/default/files/_dt/2012/wp_2013_-_nr_08.pdf
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Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1308.

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Length: 30 pages
Date of creation: 11 Feb 2013
Date of revision: 11 Feb 2013
Handle: RePEc:aim:wpaimx:1308
Contact details of provider: Web page: http://www.amse-aixmarseille.fr/en

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