Robust consumption and portfolio rules with time-varying model confidence

Bong-Gyu Jang, Seungkyu Lee and Byung Hwa Lim

Finance Research Letters, 2016, vol. 18, issue C, 342-352

Abstract: This paper investigates robust optimal consumption and portfolio rules for an Epstein-Zin type investor who is concerned about model misspecification. We propose a semi-explicit solution for the generalized problem of [Hansen, L., Sargent, T., 2001. Robust control and model uncertainty. The American Economic Review 91 (2), 60–66.]. Numerical results show that the optimal behaviors change dramatically according to the investor’s confidence level on the estimated model and that the elasticity of intertemporal substitution in consumption can affect investment ratio. In addition, we show how the investor decides her optimal behaviors for the worst-case scenario.

Keywords: Model misspecification; Robust control; Portfolio selection; Stochastic differential utility; Elasticity of intertemporal substitution; Consumption (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:18:y:2016:i:c:p:342-352

DOI: 10.1016/j.frl.2016.05.012

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