DO INSTITUTIONAL INVESTORS CARE ABOUT THE AMBIGUITY OF THEIR ASSETS? EVIDENCE FROM PORTFOLIO HOLDINGS IN ALTERNATIVE INVESTMENTS

Christian Koziol (), Juliane Proelss () and Denis Schweizer ()
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Christian Koziol: University of Hohenheim, D-70593 Stuttgart, Germany
Juliane Proelss: WHU — Otto Beisheim School of Management, D-56179 Vallendar, Germany
Denis Schweizer: WHU — Otto Beisheim School of Management, D-56179 Vallendar, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2011, vol. 14, issue 04, 465-484

Abstract: In this paper, we analyze whether model risk/asset-specific ambiguity is an issue for institutional investors. For this purpose, we first show how model risk (which turns out to be equivalent to special cases of ambiguity) affects optimal portfolio allocation. Using average portfolio holdings for traditional and alternative asset classes of 119 institutional investors, we then calibrate our model to implicitly determine the ambiguity factors of different asset classes. We find that institutional investors are strongly ambiguity-averse, as documented by a Sharpe ratio that is only 60 percent that of an (unambiguous) efficient portfolio. In line with intuition, we document that equity and bond portfolios have a rather low ambiguity, while alternative investments such as real estate, private equity, and hedge fund investments exhibit a very high ambiguity. These results are robust with regard to the size of the expected returns supposed by the investors.

Keywords: Ambiguity aversion; alternative investments; portfolio allocation; institutional investors (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024911006693

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