Optimal portfolio under ambiguous ambiguity

Dmitry Makarov

Finance Research Letters, 2021, vol. 43, issue C

Abstract: A prominent approach to modelling ambiguity about stock return distribution is to assume that investors have multiple priors about the distribution and these priors are distributed according to a certain second-order distribution. Realistically, investors may also have multiple priors about the second-order distribution, thus allowing for ambiguous ambiguity. Despite a long history of debates about this idea (Reichenbach, 1949; Savage, 1954), there seems to be no formal analysis of investment behavior in the presence of this feature. We develop a tractable portfolio choice framework incorporating ambiguous ambiguity, characterize analytically the optimal portfolio, and examine its properties.

Keywords: ambiguous ambiguity; portfolio choice; smooth ambiguity; third-order probabilities (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:43:y:2021:i:c:s1544612321000428

DOI: 10.1016/j.frl.2021.101961

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