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Asset Demand and Ambiguity Aversion

Author

Listed:
  • Chiaki Hara

    (Institute of Economic Research, Kyoto University)

  • Toshiki Honda

    (Graduate School of International Corporate Strategy, Hitotsubashi University)

Abstract

We study the optimal portfolio choice problem of an investor who is averse to both risk and ambiguity. Using the class of utility functions proposed by Klibano , Marinacci, and Mukerji (2005), we establish a generalized mutual fund theorem, which shows that there are a xed number of mutual funds that cater for all investors, regardless of their ambiguity aversion. We prove that the optimal portfolio is decomposed into two, one remaining and the other vanishing as the degree of ambiguity aversion goes to in nity. We also introduce factor models with ambiguity and compare our results with the Bayesian portfolio approach.

Suggested Citation

  • Chiaki Hara & Toshiki Honda, 2014. "Asset Demand and Ambiguity Aversion," KIER Working Papers 911, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:911
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    References listed on IDEAS

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    Keywords

    Ambiguity aversion; optimal portfolio; 1=N portfolio; mutual fund theorem; factor model; Bayesian portfolio choice problem;
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