Optimal Investment and Equilibrium Pricing under Ambiguity
Michail Anthropelos and
Additional contact information
Paul Schneider: University of Lugano - Institute of Finance; Swiss Finance Institute
No 21-78, Swiss Finance Institute Research Paper Series from Swiss Finance Institute
We consider portfolio selection under nonparametric alpha-maxmin ambiguity in the neighbourhood of a reference distribution. We show strict concavity of the portfolio problem under ambiguity aversion.Implied demand functions are nondifferentiable, resemble observed bid-ask spreads, and are consistent with existing parametric limiting participation results under ambiguity. Ambiguity seekers exhibit a discontinuous demand function, implying an empty set of reservation prices. If agents have identical, or sufficiently similar prior beliefs, the first best equilibrium is no trade. Simple sufficient conditions yield the existence of a Pareto-efficient second-best equilibrium which reconciles many observed phenomena in financial markets, such as liquidity dry-ups, portfolio inertia, and negative risk premia.
Keywords: ambiguity; equilibrium; asset pricing (search for similar items in EconPapers)
JEL-codes: C62 D84 G11 G12 G41 (search for similar items in EconPapers)
Pages: 29 pages
New Economics Papers: this item is included in nep-des, nep-mic, nep-ore and nep-upt
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Working Paper: Optimal Investment and Equilibrium Pricing under Ambiguity (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2178
Access Statistics for this paper
More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().