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ImpliedAmbiguity:Mean-Variance Efficiency andPricingErrors

Chiaki Hara () and Toshiki Honda ()
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Chiaki Hara: Institute of Economic Research, Kyoto University
Toshiki Honda: Graduate School of Business Administration, Department of Business Administration, Hitotsubashi University

No 1004, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We study the optimal portfolio choice problem for an ambiguity-averse investor having a utility function of the form of Klibanoff, Marinacci, and Mukerji (2005) and Maccheroni, Marinacci, and Ruffino (2013). We identify necessary and sufficient conditions for a given portfolio to be optimal for some ambiguity-averse investor. We also show that the smallest ambiguity aversion coefficient for the optimality of the given portfolio, which we term the implied ambiguity of the portfolio, is decreasing with respect to its Sharpe ratio. This relation can also be expressed in terms of the size of the pricing errors when the asset returns are regressed on the return of the portfolio. A numerical analysis is provided to find the ambiguity aversion implied by the U.S. equity market data.

Keywords: Ambiguityaversion; optimalportfolio; Sharperatio; beta; alpha; mutualfundtheorem. (search for similar items in EconPapers)
JEL-codes: D81 D91 G11 G12 (search for similar items in EconPapers)
Pages: 45pages
Date: 2018-10
New Economics Papers: this item is included in nep-upt
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