Ambiguity aversion for risk choice
Yuli Wang and
The North American Journal of Economics and Finance, 2020, vol. 54, issue C
This paper extends the model of the portfolio choice of hedge fund managers compensated by high-water mark contracts by incorporating three types of ambiguity aversion. Each setting is motivated by a different robust control optimization problem. The first setting illustrates that optimal portfolios are negatively affected by ambiguity aversion parameter as well as the volatility of risky assets. On the contrary, the second (κ-ignorance) and third methodology (constrained ambiguity) outline distinctive results. Under these two settings, the manager allocates more wealth to risky assets on the condition that ambiguity aversion rises. As for regular risk measured by volatility, we show that the critical value of investment strategy exhibits a U-shaped pattern against the volatility of risky assets. This is due to the game between risk attitude and market price of risk in effect.
Keywords: Ambiguity aversion; Risk; High-water mark; Portfolio choice (search for similar items in EconPapers)
JEL-codes: D81 E22 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301509
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