Portfolio Management with Stochastic Interest Rates and Inflation Ambiguity

Claus Munk, Alexey Vladimirovich Rubtsov

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Abstrakt

We solve, in closed form, a stock-bond-cash portfolio problem of a risk- and ambiguity-averse investor when interest rates and the inflation rate are stochastic. The expected inflation rate is unobservable, but the investor can learn about it from observing realized inflation and stock and bond prices. The investor is ambiguous about the inflation model and prefers a portfolio strategy which is robust to model misspecification. Ambiguity about the inflation dynamics is shown to affect the optimal portfolio fundamentally different than ambiguity about the price dynamics of traded assets, for example the optimal portfolio weights can be increasing in the degree of ambiguity aversion. In a numerical example, the optimal portfolio is significantly affected by the learning about expected inflation and somewhat affected by ambiguity aversion. The welfare loss from ignoring learning or ambiguity can be considerable.
OriginalsprogEngelsk
TidsskriftAnnals of Finance
Vol/bind10
Udgave nummer3
Sider (fra-til)419-455
Antal sider37
ISSN1614-2446
DOI
StatusUdgivet - 2014

Emneord

  • Portfolio
  • Inflation
  • Ambiguity
  • Learning
  • Robust control

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