Ambiguity and portfolio decisions

Eduardo Corso ()

No 201567, BCRA Working Paper Series from Central Bank of Argentina, Economic Research Department

Abstract: We study the household portfolio allocation in an economy with a history of nominal and macro volatility. First, applying smooth ambiguity preferences to a static portfolio choice problem, we rationalize two facts about the Argentine experience of the last 20 years: the dollarization of household financial assets and its bias towards investment real estate as a means of preserving the real value of wealth. We find that ambiguity explains portfolio dollarization. In addition, ambiguity aversion reduces the demand for assets denominated in US dollars and increases the demand for investment real estate. Second, applying recursive smooth ambiguity preferences to a consumption-based model, we find that ambiguity and ambiguity aversion may be relevant factors behind the equilibrium returns of low relative risk assets in Argentina. In addition, ambiguity and ambiguity aversion may be relevant factors explaining equity premiums.

Keywords: ambiguity; ambiguity aversion; dollarization; real state investment; reserve value (search for similar items in EconPapers)
JEL-codes: D14 G10 G11 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2015-11
New Economics Papers: this item is included in nep-upt
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