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Asset Demand and Ambiguity Aversion

Chiaki Hara () and Toshiki Honda ()
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Chiaki Hara: Institute of Economic Research, Kyoto University
Toshiki Honda: Graduate School of International Corporate Strategy, Hitotsubashi University

No 911, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We study the optimal portfolio choice problem of an investor who is averse to both risk and ambiguity. Using the class of utility functions proposed by Klibano , Marinacci, and Mukerji (2005), we establish a generalized mutual fund theorem, which shows that there are a xed number of mutual funds that cater for all investors, regardless of their ambiguity aversion. We prove that the optimal portfolio is decomposed into two, one remaining and the other vanishing as the degree of ambiguity aversion goes to in nity. We also introduce factor models with ambiguity and compare our results with the Bayesian portfolio approach.

Keywords: Ambiguity aversion; optimal portfolio; 1=N portfolio; mutual fund theorem; factor model; Bayesian portfolio choice problem (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-mic and nep-upt
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