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Life-Cycle Asset Allocation with Ambiguity Aversion and Learning

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  • Kim Peijnenburg

    (Bocconi University)

Abstract

I show that ambiguity (Knightian uncertainty) and learning about the equity premium can simultane- ously explain the low fraction of financial wealth allocated to stocks over the life cycle as well as the stock market participation puzzle. I assume that individuals are ambiguous about the size of the equity premium and are averse with respect to this ambiguity, which results in a lower optimal allocation to stocks over the life cycle. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity aversion leads to higher saving rates.

Suggested Citation

  • Kim Peijnenburg, 2014. "Life-Cycle Asset Allocation with Ambiguity Aversion and Learning," 2014 Meeting Papers 967, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:967
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    References listed on IDEAS

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