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A Mean‐Preserving Increase in Ambiguity and Portfolio Choices

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  • Yi‐Chieh Huang
  • Larry Y. Tzeng

Abstract

This article investigates under what conditions an increase in ambiguity reduces demand for an uncertain asset (or raises demand for coinsurance). We find that the comparative statics of ambiguity and of risks have structural similarities under the smooth ambiguity aversion model (Klibanoff, Marinacci, and Mukerji, ()). The determinant condition on ambiguity preferences is analogous to that on risk preferences. However, the comparative statics have fundamental differences under the α‐maxmin model (Ghirardato, Maccheroni, and Marinacci, ()). When relative risk aversion is less than 1, only an increase in ambiguity, which broadens support for an investor's belief in the probability of the return distribution in the manner of a strong increase in risk, can reduce demand for an uncertain asset.

Suggested Citation

  • Yi‐Chieh Huang & Larry Y. Tzeng, 2018. "A Mean‐Preserving Increase in Ambiguity and Portfolio Choices," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(4), pages 993-1012, December.
    • Handle: RePEc:bla:jrinsu:v:85:y:2018:i:4:p:993-1012
    DOI: 10.1111/jori.12188
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    Cited by:

    1. Wong, Kit Pong, 2024. "Optimal nonlinear pricing by a monopoly with smooth ambiguity preferences," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 594-604.
    2. Peter, Richard, 2019. "Revisiting precautionary saving under ambiguity," Economics Letters, Elsevier, vol. 174(C), pages 123-127.
    3. Fujii, Yoichiro & Osaki, Yusuke, 2019. "The willingness to pay for health improvement under comorbidity ambiguity," Journal of Health Economics, Elsevier, vol. 66(C), pages 91-100.
    4. Victor Filipe Martins da Rocha & Rafael Mouallem, 2020. "Second-Order Beliefs and Second-Order Expected Utility," Working Papers hal-02922263, HAL.
    5. Takao Asano & Yusuke Osaki, 2020. "Portfolio allocation problems between risky and ambiguous assets," Annals of Operations Research, Springer, vol. 284(1), pages 63-79, January.

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