Life-Cycle Asset Allocation with Ambiguity Aversion and Learning

Kim Peijnenburg

No 967, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: I show that ambiguity (Knightian uncertainty) and learning about the equity premium can simultane- ously explain the low fraction of financial wealth allocated to stocks over the life cycle as well as the stock market participation puzzle. I assume that individuals are ambiguous about the size of the equity premium and are averse with respect to this ambiguity, which results in a lower optimal allocation to stocks over the life cycle. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity aversion leads to higher saving rates.

Date: 2014
New Economics Papers: this item is included in nep-dge and nep-upt
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Journal Article: Life-Cycle Asset Allocation with Ambiguity Aversion and Learning (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:967

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