Robustly Strategic Consumption-Portfolio Rules with Informational Frictions

Yulei Luo ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Robustness; Model Uncertainty; Rational Inattention; Uninsurable Labor Income; Strategic Asset Allocation; Precautionary Savings (search for similar items in EconPapers)
JEL-codes: E21 G00 G11 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-mac, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:64312

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