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Uncertainty Aversion, Robust Control and Asset Holdings

Author

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  • Giannis Vardas

    (Department of Economics, University of Crete, Greece)

  • Anastasios Xepapadeas

    () (Department of Economics, University of Crete, Greece)

Abstract

Optimal portfolio rules are derived under uncertainty aversion by formulating the portfolio choice problem as a robust control problem. The robust portfolio rule indicates that the total holdings of risky assets as a proportion of the investor’s wealth could increase as compared to the holdings under the Merton rule, which is the standard risk aversion case. In particular, with two risky assets and one risk-free asset, we show that uncertainty aversion could lead to an increase in the holdings of the one risky asset, accompanied by a reduction in the holdings of the other risky asset. Furthermore, in the optimal robust portfolio the investor may increase the holdings of the asset for which there is or less ambiguity, and reduce the holdings of the asset for which there is more ambiguity, a result that might provide an explanation of the home bias puzzle.

Suggested Citation

  • Giannis Vardas & Anastasios Xepapadeas, 2004. "Uncertainty Aversion, Robust Control and Asset Holdings," Working Papers 0402, University of Crete, Department of Economics.
  • Handle: RePEc:crt:wpaper:0402
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    File URL: http://economics.soc.uoc.gr/wpa/docs/Vardas_Xepapad_Subm_JET_Feb04.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Horváth, Ferenc, 2017. "Essays on robust asset pricing," Other publications TiSEM e54d7b33-1f27-4b0e-9f84-f, Tilburg University, School of Economics and Management.
    2. Anton Bondarev & Frank C. Krysiak, 2017. "Robust policy schemes for R&D games with asymmetric information," Working papers 2017/14, Faculty of Business and Economics - University of Basel.
    3. Enrico Maria Cervellati & Pierpaolo Pattitoni & Marco Savioli, 2016. "Cognitive Biases and Entrepreneurial Under-Diversification," Working Paper series 16-24, Rimini Centre for Economic Analysis.
    4. Giannis Vardas & Anastasios Xepapadeas, 2004. "Uncertainty Aversion and Robust Portfolio Choices," Working Papers 0408, University of Crete, Department of Economics.
    5. Bondarev, Anton & Krysiak, Frank C., 2017. "Temporary and permanent technology lock-ins in the quality-differentiated Bertrand competition," Working papers 2017/09, Faculty of Business and Economics - University of Basel.

    More about this item

    Keywords

    Uncertainty Aversion; Model Misspecification; Robust Control; Portfolio Choice Models;

    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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