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Learning, Ambiguity and Life-cycle Portfolio Allocation

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  • Claudio Campanale

    (University of Alicante and CeRP-Collegio Carlo Alberto, Turin)

Abstract

In the present paper I develop a life-cycle portfolio choice model where agents perceive stock returns to be ambiguous and are ambiguity averse. As in Epstein and Schneider (2005) part of the ambiguity vanishes over time as a consequence of learning over observed returns. The model shows that ambiguity alone can rationalize moderate stock market participation rates and conditional shares with reasonable participation costs but has strongly counterfactual implications for conditional allocations to stocks by age and wealth. When learning is allowed, conditional shares over the life-cycle are instead aligned with the empirical evidence and patterns of stock holdings over the wealth distribution get closer to the data.

Suggested Citation

  • Claudio Campanale, 2008. "Learning, Ambiguity and Life-cycle Portfolio Allocation," CeRP Working Papers 80, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  • Handle: RePEc:crp:wpaper:80
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    Cited by:

    1. Li, Wenhui & Wilde, Christian, 2020. "Belief formation and belief updating under ambiguity: Evidence from experiments," SAFE Working Paper Series 251, Leibniz Institute for Financial Research SAFE, revised 2020.
    2. repec:esx:essedp:719 is not listed on IDEAS
    3. repec:esx:essedp:770 is not listed on IDEAS
    4. Hening Liu, 2011. "Dynamic portfolio choice under ambiguity and regime switching mean returns," Post-Print hal-00781344, HAL.
    5. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    6. Peijnenburg, Kim, 2018. "Life-Cycle Asset Allocation with Ambiguity Aversion and Learning," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(5), pages 1963-1994, October.
    7. Hui Chen & Nengjiu Ju & Jianjun Miao, 2014. "Dynamic Asset Allocation with Ambiguous Return Predictability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 799-823, October.
    8. Kartik B. Athreya & Xuan S. Tam & Eric Young, 2012. "Debt default and the insurance of labor income risks," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 98(4Q), pages 255-307.
    9. Briggs, Joseph & Cesarini, David & Lindqvist, Erik & Östling, Robert, 2021. "Windfall gains and stock market participation," Journal of Financial Economics, Elsevier, vol. 139(1), pages 57-83.
    10. Enrica Carbone & Konstantinos Georgalos & Gerardo Infante, 2019. "Individual vs. group decision-making: an experiment on dynamic choice under risk and ambiguity," Theory and Decision, Springer, vol. 87(1), pages 87-122, July.
    11. Guidolin, Massimo & Liu, Hening, 2016. "Ambiguity Aversion and Underdiversification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(4), pages 1297-1323, August.
    12. Yongsung Chang & Jay H. Hong & Marios Karabarbounis, 2018. "Labor Market Uncertainty and Portfolio Choice Puzzles," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 222-262, April.
    13. Illeditsch, PK & Ganguli, J & Condie, S, 2015. "Information Inertia," Economics Discussion Papers 15615, University of Essex, Department of Economics.
    14. Enrico G. De Giorgi & Ola Mahmoud, 2016. "Diversification preferences in the theory of choice," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 39(2), pages 143-174, November.
    15. Cherbonnier, Frédéric & Gollier, Christian, 2015. "Decreasing aversion under ambiguity," Journal of Economic Theory, Elsevier, vol. 157(C), pages 606-623.
    16. Massimo Guidolin & Francesca Rinaldi, 2013. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Theory and Decision, Springer, vol. 74(2), pages 183-217, February.
    17. Kartik B. Athreya & Xuan S. Tam & Eric Young, 2009. "Are harsh penalties for default really better?," Working Paper 09-11, Federal Reserve Bank of Richmond.
    18. Ganguli, J & Condie, S & Illeditsch, PK, 2012. "Information Inertia," Economics Discussion Papers 5628, University of Essex, Department of Economics.
    19. Martin Schneider, 2010. "The Research Agenda: Martin Schneider on Multiple Priors Preferences and Financial Markets," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 11(2), April.
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    More about this item

    Keywords

    portfolio choice; life-cycle; ambiguity; learning;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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