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Ambiguity and portfolio decisions

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  • Eduardo Corso

    () (Central Bank of Argentina)

Abstract

We study the household portfolio allocation in an economy with a history of nominal and macro volatility. First, applying smooth ambiguity preferences to a static portfolio choice problem, we rationalize two facts about the Argentine experience of the last 20 years: the dollarization of household financial assets and its bias towards investment real estate as a means of preserving the real value of wealth. We find that ambiguity explains portfolio dollarization. In addition, ambiguity aversion reduces the demand for assets denominated in US dollars and increases the demand for investment real estate. Second, applying recursive smooth ambiguity preferences to a consumption-based model, we find that ambiguity and ambiguity aversion may be relevant factors behind the equilibrium returns of low relative risk assets in Argentina. In addition, ambiguity and ambiguity aversion may be relevant factors explaining equity premiums.

Suggested Citation

  • Eduardo Corso, 2015. "Ambiguity and portfolio decisions," BCRA Working Paper Series 201567, Central Bank of Argentina, Economic Research Department.
  • Handle: RePEc:bcr:wpaper:201567
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    File URL: http://www.bcra.gov.ar/Pdfs/Investigaciones/WP_67_2015e.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    ambiguity; ambiguity aversion; dollarization; real state investment; reserve value;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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