Life-Cycle Asset Allocation with Ambiguity Aversion and Learning

56 Pages Posted: 16 Mar 2011 Last revised: 27 Jul 2016

See all articles by Kim Peijnenburg

Kim Peijnenburg

Netspar; Centre for Economic Policy Research (CEPR); EDHEC Business School - Department of Economics & Finance

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

Peijnenburg, Kim, Life-Cycle Asset Allocation with Ambiguity Aversion and Learning (July 26, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1785321 or http://dx.doi.org/10.2139/ssrn.1785321

Kim Peijnenburg (Contact Author)

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

EDHEC Business School - Department of Economics & Finance ( email )

France

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