 Ambiguity, Risk and Portfolio Choice under Incomplete InformationNo wp2009-019, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics Abstract: This paper studies optimal consumption and portfolio choice in a Mertonstyle model with incomplete information when there is a distinction between ambiguity and risk. The latter distinction is afforded by adoption of recursive multiple-priors utility. The fundamental issues are: (i) How does the agent optimally estimate the unobservable processes as new information arrives over time? (ii) What are the effects of ambiguity and incomplete information on behavior? This paper shows that it is optimal to first use any prior to perform Bayesian estimation and then to maximize expected utility with that prior based on the resulting estimates. Finally, the paper shows that a hedging demand arises that is affected by both ambiguity and estimation risk. Keywords: Ambiguity; Recursive multiple-priors utility; Incomplete information; Portfolio choice; Hedging; Estimation risk (search for similar items in EconPapers) Published, ANNALS OF ECONOMICS AND FINANCE 10-2, 257–279 (2009) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2009-019 Access Statistics for this paper More papers in Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics Contact information at EDIRC. |
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