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Robustly Strategic Consumption-Portfolio Rules with Informational Frictions

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  • Luo, Yulei

Abstract

This paper provides a tractable continuous-time constant-absolute-risk averse (CARA)-Gaussian framework to explore how the interactions of fundamental uncertainty, model uncertainty due to a preference for robustness (RB), and state uncertainty due to information-processing constraints (rational inattention or RI) affect strategic consumption-portfolio rules and precautionary savings in the presence of uninsurable labor income. Specifically, after solving the model explicitly, I compute and compare the elasticities of strategic asset allocation and precautionary savings to risk aversion, robustness, and inattention. Furthermore, for plausibly estimated and calibrated model parameters, I quantitatively analyze how the interactions of model uncertainty and state uncertainty affect the optimal share invested in the risky asset, and show that they can provide a potential explanation for the observed stockholding behavior of households with different education and income levels.

Suggested Citation

  • Luo, Yulei, 2015. "Robustly Strategic Consumption-Portfolio Rules with Informational Frictions," MPRA Paper 64312, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:64312
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    References listed on IDEAS

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    Cited by:

    1. Wang, Gaowang, 2014. "Model Uncertainty, the Spirit of Capitalism and Asset Pricing," MPRA Paper 62421, University Library of Munich, Germany, revised 03 Mar 2015.
    2. Yulei Luo & Eric R. Young, 2016. "Long‐Run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 325-362, March.

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    More about this item

    Keywords

    Robustness; Model Uncertainty; Rational Inattention; Uninsurable Labor Income; Strategic Asset Allocation; Precautionary Savings;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G00 - Financial Economics - - General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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