Robust Portfolio Choice with Ambiguity and Learning About Return Predictability

Nicole Branger, Linda Sandris Larsen, 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
DOIs
Publication statusPublished - May 2013

Cite this

Branger, Nicole ; Larsen, Linda Sandris ; 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.
@article{81f913e895bf4906a4d78ab771e27158,
title = "Robust Portfolio Choice with Ambiguity and Learning About Return Predictability",
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.",
keywords = "Return predictability, Portfolio choice, Ambiguity, Learning, Robust control",
author = "Nicole Branger and Larsen, {Linda Sandris} and Claus Munk",
year = "2013",
month = "5",
doi = "10.1016/j.jbankfin.2012.05.009",
language = "English",
volume = "37",
pages = "1397--1411",
journal = "Journal of Banking & Finance",
issn = "0378-4266",
publisher = "Elsevier",
number = "5",

}

Robust Portfolio Choice with Ambiguity and Learning About Return Predictability. / Branger, Nicole; Larsen, Linda Sandris; Munk, Claus.

In: Journal of Banking & Finance, Vol. 37, No. 5, 05.2013, p. 1397-1411.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - Robust Portfolio Choice with Ambiguity and Learning About Return Predictability

AU - Branger, Nicole

AU - Larsen, Linda Sandris

AU - Munk, Claus

PY - 2013/5

Y1 - 2013/5

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.

KW - Return predictability

KW - Portfolio choice

KW - Ambiguity

KW - Learning

KW - Robust control

U2 - 10.1016/j.jbankfin.2012.05.009

DO - 10.1016/j.jbankfin.2012.05.009

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 -