Optimal portfolio under ambiguous ambiguity

Dmitry Makarov ()

MPRA Paper from University Library of Munich, Germany

Abstract: A prominent approach to modelling ambiguity about stock return distribution is to assume that investors have multiple priors about the distribution and these priors are distributed according to a certain second-order distribution. Realistically, investors may also have multiple priors about the second-order distribution, thus allowing for ambiguous ambiguity. Despite a long history of debates about this idea (Reichenbach [1949], Savage [1954]), there seems to be no formal analysis of investment behavior in the presence of this feature. We develop a tractable portfolio choice framework incorporating ambiguous ambiguity, characterize analytically the optimal portfolio, and examine its properties.

Keywords: ambiguous ambiguity; portfolio choice; smooth ambiguity; third-order probabilities (search for similar items in EconPapers)
JEL-codes: D81 G11 (search for similar items in EconPapers)
Date: 2020-06, Revised 2020-12
New Economics Papers: this item is included in nep-cwa, nep-mic, nep-ore, nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:108837

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