Uncertainty Aversion, Robust Control and Asset Holdings

Anastasios Xepapadeas () and Giannis Vardas ()

No 2004.66, Working Papers from Fondazione Eni Enrico Mattei

Abstract: Optimal portfolio rules are derived under uncertainty aversion by formulating the portfolio choice problem as a robust control problem. The robust portfolio rule indicates that the total holdings of risky assets as a proportion of the investor’s wealth could increase as compared to the holdings under the Merton rule, which is the standard risk aversion case. With two risky assets an increase in the holdings of the one risky asset is accompanied by a reduction in the holdings of the other asset. Furthermore, in the optimal robust portfolio the investor may increase the holdings of the asset for which there is or less ambiguity, and reduce the holding of the asset for which there is more ambiguity, a result that might provide an explanation of the home bias puzzle.

Keywords: Uncertainty aversion; Model misspecification; Robust control; Portfolio choice models (search for similar items in EconPapers)
JEL-codes: G11 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env, nep-fin and nep-mic
Date: 2004-04
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Working Paper: Uncertainty Aversion, Robust Control and Asset Holdings (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:fem:femwpa:2004.66

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