Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets

Wujun Lv (), Tao Pang (), Xiaobao Xia () and Jingzhou Yan ()
Additional contact information
Wujun Lv: Donghua University
Tao Pang: North Carolina State University
Xiaobao Xia: Fudan University
Jingzhou Yan: Sichuan University

Financial Innovation, 2023, vol. 9, issue 1, 1-28

Abstract: Abstract In response to the unprecedented uncertain rare events of the last decade, we derive an optimal portfolio choice problem in a semi-closed form by integrating price diffusion ambiguity, volatility diffusion ambiguity, and jump ambiguity occurring in the traditional stock market and the cryptocurrency market into a single framework. We reach the following conclusions in both markets: first, price diffusion and jump ambiguity mainly determine detection-error probability; second, optimal choice is more significantly affected by price diffusion ambiguity than by jump ambiguity, and trivially affected by volatility diffusion ambiguity. In addition, investors tend to be more aggressive in a stable market than in a volatile one. Next, given a larger volatility jump size, investors tend to increase their portfolio during downward price jumps and decrease it during upward price jumps. Finally, the welfare loss caused by price diffusion ambiguity is more pronounced than that caused by jump ambiguity in an incomplete market. These findings enrich the extant literature on effects of ambiguity on the traditional stock market and the evolving cryptocurrency market. The results have implications for both investors and regulators.

Keywords: Robust portfolio choice; Detection error probability; Rare events; Ambiguity; Cryptocurrency; Welfare loss (search for similar items in EconPapers)
JEL-codes: D81 G11 G41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1186/s40854-023-00472-8 Abstract (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:fininn:v:9:y:2023:i:1:d:10.1186_s40854-023-00472-8

Ordering information: This journal article can be ordered from
http://www.springer. ... nomics/journal/40589

DOI: 10.1186/s40854-023-00472-8

Access Statistics for this article

Financial Innovation is currently edited by J. Leon Zhao and Zongyi

More articles in Financial Innovation from Springer, Southwestern University of Finance and Economics
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().