Risk, ambiguity, and the value of diversification

Loïc Berger and Louis Eeckhoudt ()
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Louis Eeckhoudt: IESEG School of Management, UMR 9221-LEM, F-59000 Lille, France

Working Papers from IESEG School of Management

Abstract: Diversification is a basic economic principle that helps to hedge against uncertainty. It is therefore intuitive that both risk aversion and ambiguity aversion should positively affect the value of diversification. In this paper, we show that this intuition (1) is true for risk aversionbut (2) is not necessarily true for ambiguity aversion. We derive sufficient conditions, showing that, contrary to the economic intuition, ambiguity and ambiguity aversion may actually reduce the diversification value.

Keywords: Diversification; ambiguity aversion; model uncertainty; hedging (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2021-04
New Economics Papers: this item is included in nep-cwa, nep-mic, nep-rmg and nep-upt
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Citations: View citations in EconPapers (2)

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Working Paper: Risk, ambiguity, and the value of diversification (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ies:wpaper:e202104

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