Mutual Fund Theorem for Ambiguity-Averse Investors and the Optimality of the Market Portfolio

Chiaki Hara () and Toshiki Honda ()
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Chiaki Hara: Kyoto Institute of Economic Research, Kyoto University
Toshiki Honda: Graduate School of International Corporate Strategy, Hitotsubashi University

No 943, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We study the optimal portfolio choice problem for an ambiguity-averse investor having a utility function of the form of Klibanoff, Marinacci, and Mukerji (2005) and Maccheroni, Marinacci, and Ru no (2013) in an ambiguity-inclusive CARA- normal setup. We extend the mutual fund theorem to accommodate ambiguity, identify a necessary and sufficient condition for a given portfolio to be optimal for some ambiguity-averse investor, characterize all the ambiguity structure under which the given portfolio is optimal, and nd the minimal ones in two senses to be made precise. We also calculate the minimal ambiguity structures based on the U.S. equity market data and nd the smallest coefficient of ambiguity aversion with which the market portfolio is optimal is equal to 9.31.

Keywords: Ambiguity aversion; optimal portfolio; mutual fund theorem; FF6; portfolios; market portfolio. (search for similar items in EconPapers)
JEL-codes: C38 D81 G11 (search for similar items in EconPapers)
Pages: 46pages
Date: 2016-06
New Economics Papers: this item is included in nep-fmk and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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