Life-Cycle Asset Allocation with Ambiguity Aversion and Learning
56 Pages Posted: 16 Mar 2011 Last revised: 27 Jul 2016
Date Written: July 26, 2016
Abstract
Ambiguity and learning about the equity premium can simultaneously explain the low fraction of financial wealth allocated to stocks over the life cycle and the stock market participation puzzle. Individuals are ambiguous about the size of the equity premium and are averse to this ambiguity, resulting in lower stock allocations over the life cycle consistent with the data. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity leads to underdiversification, home bias, lower Sharpe ratios, and higher savings. Similar results cannot be obtained by assuming higher risk aversion.
Keywords: Life-cycle portfolio choice, ambiguity aversion, learning, underdiversification
JEL Classification: D14, D8, D91, G11
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A Smooth Model of Decision Making Under Ambiguity
By Peter Klibanoff, Massimo Marinacci, ...
-
Model Misspecification and Under-Diversification
By Tan Wang and Raman Uppal
-
Model Misspecification and Under-Diversification
By Tan Wang and Raman Uppal
-
By Larry G. Epstein and Martin Schneider
-
Model Uncertainty, Limited Market Participation and Asset Prices
By H. Henry Cao, Harold H. Zhang, ...
-
Ambiguity, Learning, and Asset Returns
By Nengjiu Ju and Jianjun Miao
-
Learning and Asset Prices Under Ambiguous Information
By Paolo Vanini, Markus Leippold, ...
-
By David Easley and Maureen O'hara
-
By Larry G. Epstein and Martin Schneider