Robust portfolio choice with ambiguity and learning about return predictability

Linda Sandris Larsen, Nicole Branger, Claus Munk

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We analyze the optimal stock-bond portfolio under both learning and ambiguity aversion. Stock returns are predictable by an observable and an unobservable predictor, and the investor has to learn about the latter. Furthermore, the investor is ambiguity-averse and has a preference for investment strategies that are robust to model misspecifications. We derive a closed-form solution for the optimal robust investment strategy. We find that both learning and ambiguity aversion impact the level and structure of the optimal stock investment. Suboptimal strategies resulting either from not learning or from not considering ambiguity can lead to economically significant losses.
Original languageEnglish
JournalJournal of Banking & Finance
Volume37
Issue number5
Pages (from-to)1397-1411
ISSN0378-4266
Publication statusPublished - 2013

Cite this

Larsen, Linda Sandris ; Branger, Nicole ; Munk, Claus. / Robust portfolio choice with ambiguity and learning about return predictability. In: Journal of Banking & Finance. 2013 ; Vol. 37, No. 5. pp. 1397-1411.
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Larsen, LS, Branger, N & Munk, C 2013, 'Robust portfolio choice with ambiguity and learning about return predictability', Journal of Banking & Finance, vol. 37, no. 5, pp. 1397-1411.

Robust portfolio choice with ambiguity and learning about return predictability. / Larsen, Linda Sandris; Branger, Nicole; Munk, Claus.

In: Journal of Banking & Finance, Vol. 37, No. 5, 2013, p. 1397-1411.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - Robust portfolio choice with ambiguity and learning about return predictability

AU - Larsen, Linda Sandris

AU - Branger, Nicole

AU - Munk, Claus

PY - 2013

Y1 - 2013

N2 - We analyze the optimal stock-bond portfolio under both learning and ambiguity aversion. Stock returns are predictable by an observable and an unobservable predictor, and the investor has to learn about the latter. Furthermore, the investor is ambiguity-averse and has a preference for investment strategies that are robust to model misspecifications. We derive a closed-form solution for the optimal robust investment strategy. We find that both learning and ambiguity aversion impact the level and structure of the optimal stock investment. Suboptimal strategies resulting either from not learning or from not considering ambiguity can lead to economically significant losses.

AB - We analyze the optimal stock-bond portfolio under both learning and ambiguity aversion. Stock returns are predictable by an observable and an unobservable predictor, and the investor has to learn about the latter. Furthermore, the investor is ambiguity-averse and has a preference for investment strategies that are robust to model misspecifications. We derive a closed-form solution for the optimal robust investment strategy. We find that both learning and ambiguity aversion impact the level and structure of the optimal stock investment. Suboptimal strategies resulting either from not learning or from not considering ambiguity can lead to economically significant losses.

M3 - Journal article

VL - 37

SP - 1397

EP - 1411

JO - Journal of Banking & Finance

JF - Journal of Banking & Finance

SN - 0378-4266

IS - 5

ER -