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Mean-Variance Optimization in Ambiguous Financial Markets with Learning

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  • Nicole Bauerle
  • Anne MacKay

Abstract

We consider a continuous time investment problem in a multi-asset Black-Scholes market with the following features: The assets' drifts are not known and constitute a source of model ambiguity. However, there is a prior distribution (knowledge) on the possible drifts. Our investor is ambiguity averse and wants to maximize a mean-variance criterion for the terminal wealth where ambiguity aversion is incorporated in a smooth way. We consider here the criterion introduced in Maccheroni et al. 2013 where the variance is decomposed and each part is weighted differently to account for different levels of market risk and model ambiguity aversion. We use a novel approach to find the optimal dynamic investment strategy within the class of all adapted strategies which allow for learning. We also present a number of numerical results which help to understand how the model parameters affect the optimal investment strategy. In general it turns out that ambiguity averse investors invest less in the risky assets.

Suggested Citation

  • Nicole Bauerle & Anne MacKay, 2026. "Mean-Variance Optimization in Ambiguous Financial Markets with Learning," Papers 2606.11318, arXiv.org.
  • Handle: RePEc:arx:papers:2606.11318
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    References listed on IDEAS

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    2. David Easley & Maureen O'Hara, 2009. "Ambiguity and Nonparticipation: The Role of Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1817-1843, May.
    3. Leonard MacLean & Yonggan Zhao & William Ziemba, 2011. "Mean-variance versus expected utility in dynamic investment analysis," Computational Management Science, Springer, vol. 8(1), pages 3-22, April.
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    6. Balter, Anne G. & Mahayni, Antje & Schweizer, Nikolaus, 2021. "Time-consistency of optimal investment under smooth ambiguity," European Journal of Operational Research, Elsevier, vol. 293(2), pages 643-657.
    7. Elliott, Robert J. & Siu, Tak Kuen & Badescu, Alex, 2010. "On mean-variance portfolio selection under a hidden Markovian regime-switching model," Economic Modelling, Elsevier, vol. 27(3), pages 678-686, May.
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