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Optimal consumption and portfolio choice with ambiguity

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  • Qian Lin
  • Frank Riedel

Abstract

We consider optimal consumption and portfolio choice in the presence of Knightian uncertainty in continuous-time. We embed the problem into the new framework of stochastic calculus for such settings, dealing in particular with the issue of non-equivalent multiple priors. We solve the problem completely by identifying the worst--case measure. Our setup also allows to consider interest rate uncertainty; we show that under some robust parameter constellations, the investor optimally puts all his wealth into the asset market, and does not save or borrow at all.

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  • Qian Lin & Frank Riedel, 2014. "Optimal consumption and portfolio choice with ambiguity," Papers 1401.1639, arXiv.org.
    • Handle: RePEc:arx:papers:1401.1639
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    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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