Robust portfolio choice with uncertainty about jump and diffusion risk

Nicole Branger and Linda Sandris Larsen

Journal of Banking & Finance, 2013, vol. 37, issue 12, 5036-5047

Abstract: We analyze the portfolio planning problem of an ambiguity averse investor. The stock follows a jump-diffusion process. We find that there are pronounced differences between ambiguity aversion with respect to diffusion risk and jump risk. Ignoring ambiguity with respect to jump risk causes larger losses in an incomplete market, whereas ignoring ambiguity with respect to diffusion risk is more severe in a complete market. For a deterministic jump size we show that the loss from market incompleteness is always increasing in the level of ambiguity aversion with respect to one risk factor and decreasing in the level of ambiguity aversion with respect to the other risk factor.

Keywords: Ambiguity; Jump-diffusion model; Robust control; Utility loss; Market completeness (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:12:p:5036-5047

DOI: 10.1016/j.jbankfin.2013.08.023

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