IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Alpha as Ambiguity: Robust Mean-Variance Portfolio Analysis

  • Fabio Maccheroni
  • Massimo Marinacci
  • Doriana Ruffino

We derive the analogue of the classic Arrow-Pratt approximation of the certainty equivalent under model uncertainty as defined by the smooth model of decision making under ambiguity of Klibanoff, Marinacci and Mukerji (2005). We study its scope via a portfolio allocation exercise that delivers a tractable mean-variance model adjusted for model uncertainty. In a problem with a risk-free asset, a risky asset, and an ambiguous asset, we find that portfolio rebalancing in response to higher model uncertainty only depends on the ambiguous asset's alpha, setting the performance of the risky asset as benchmark. In addition, the portfolios recommended by our model are not systematically conservative on the share held in the ambiguous asset: indeed, in general, it is not true that greater ambiguity reduces the optimal demand for the ambiguous asset. The analytical tractability of the enhanced Arrow-Pratt approximation renders our model especially well suited for calibration exercises aimed at exploring the consequences of ambiguity aversion on equilibrium asset prices.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: ftp://ftp.igier.unibocconi.it/wp/2010/373.pdf
Download Restriction: no

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 373.

as
in new window

Length:
Date of creation: 2010
Date of revision:
Handle: RePEc:igi:igierp:373
Contact details of provider: Postal: via Rontgen, 1 - 20136 Milano (Italy)
Phone: 0039-02-58363301
Fax: 0039-02-58363302
Web page: http://www.igier.unibocconi.it/

Order Information: Web: http://www.igier.unibocconi.it/en/papers/index.htm Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ju, Nengjiu & Miao, Jianjun, 2009. "Ambiguity, Learning, and Asset Returns," MPRA Paper 14737, University Library of Munich, Germany, revised Apr 2009.
  2. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
  3. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002. "A smooth model of decision making under ambiguity," ICER Working Papers - Applied Mathematics Series 11-2003, ICER - International Centre for Economic Research, revised Apr 2003.
  4. Cerreia-Vioglio, S. & Maccheroni, F. & Marinacci, M. & Montrucchio, L., 2011. "Uncertainty averse preferences," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1275-1330, July.
  5. Larry G. Epstein & JianJun Miao, 2001. "A Two-Person Dynamic Equilibrium under Ambiguity," RCER Working Papers 478, University of Rochester - Center for Economic Research (RCER).
  6. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini & Marco Taboga, 2004. "Portfolio Selection with Monotone Mean-Variance Preferences," Carlo Alberto Notebooks 6, Collegio Carlo Alberto, revised 2007.
  7. Judson A. Caskey, 2009. "Information in Equity Markets with Ambiguity-Averse Investors," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3595-3627, September.
  8. Fabrice Collard & Sujoy Mukerji & Kevin Sheppard & Jean-Marc Tallon, 2011. "Ambiguity and the historical equity premium," Documents de travail du Centre d'Economie de la Sorbonne 11032, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:igi:igierp:373. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.