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Portfolio Selection with Two-Stage Preferences

Author

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  • Marco Taboga

    (Banca d'Italia Bank of Italy)

Abstract

We propose a model of portfolio selection under ambiguity, based on a two-stage valuation procedure which disentangles ambiguity and ambiguity aversion. The model does not imply 'extreme pessimism' from the part of the investor, as multiple priors models do. Furthermore, its analytical tractability allows to study complex problems thus far not analyzed, such as joint uncertainty about means and variances of returns.

Suggested Citation

  • Marco Taboga, 2005. "Portfolio Selection with Two-Stage Preferences," Finance 0506009, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0506009
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    References listed on IDEAS

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    7. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
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    9. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    10. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    11. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
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    16. Evan W. Anderson & Lars Peter Hansen & Thomas J. Sargent, 2003. "A Quartet of Semigroups for Model Specification, Robustness, Prices of Risk, and Model Detection," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 68-123, March.
    17. Massimo Guidolin & Allan Timmerman, 2005. "Optimal portfolio choice under regime switching, skew and kurtosis preferences," Working Papers 2005-006, Federal Reserve Bank of St. Louis.
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    Citations

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    Cited by:

    1. Matteo Del Vigna, 2011. "Ambiguity made easier," Working Papers - Mathematical Economics 2011-07, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    2. Christophe Courbage & Béatrice Rey, 2015. "On ambiguity apportionment," Working Papers 1527, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    3. André, Eric, 2014. "Optimal portfolio with vector expected utility," Mathematical Social Sciences, Elsevier, vol. 69(C), pages 50-62.
    4. Kit Pong Wong, 2015. "A Smooth Ambiguity Model Of The Competitive Firm," Bulletin of Economic Research, Wiley Blackwell, vol. 67(S1), pages 97-110, December.
    5. Christophe Courbage & Beatrice Rey, 2016. "On ambiguity apportionment," Journal of Economics, Springer, vol. 118(3), pages 265-275, July.
    6. Broll, Udo & Welzel, Peter & Wong, Kit Pong, 2016. "The banking firm under ambiguity aversion," CEPIE Working Papers 01/16, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    7. Wong, Kit Pong, 2016. "Ambiguity and the multinational firm," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 404-414.
    8. Massimo Marinacci, 2015. "Model Uncertainty," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1022-1100, December.
    9. Haas, Markus, 2016. "A note on optimal portfolios under regime–switching," Finance Research Letters, Elsevier, vol. 19(C), pages 209-216.
    10. Broll, Udo & Wong, Kit Pong, 2014. "Ambiguity and the incentive to export," Dresden Discussion Paper Series in Economics 01/14, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    11. Eduardo Corso, 2015. "Ambiguity and portfolio decisions," BCRA Working Paper Series 201567, Central Bank of Argentina, Economic Research Department.
    12. Christian Gollier, 2011. "Portfolio Choices and Asset Prices: The Comparative Statics of Ambiguity Aversion," Review of Economic Studies, Oxford University Press, vol. 78(4), pages 1329-1344.
    13. Hua Chen & Michael Sherris & Tao Sun & Wenge Zhu, 2013. "Living With Ambiguity: Pricing Mortality-Linked Securities With Smooth Ambiguity Preferences," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(3), pages 705-732, September.
    14. Yehuda Izhakian, 2012. "Capital Asset Pricing Under Ambiguity," Working Papers 12-02, New York University, Leonard N. Stern School of Business, Department of Economics.
    15. Christophe Courbage & Béatrice Rey-Fournier, 2015. "On ambiguity apportionment," Working Papers halshs-01223230, HAL.
    16. repec:eee:joecas:v:12:y:2015:i:2:p:190-196 is not listed on IDEAS

    More about this item

    Keywords

    ambiguity; portfolio selection; parameter uncertainty.;

    JEL classification:

    • G - Financial Economics

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