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Portfolio allocation problems between risky and ambiguous assets

Author

Listed:
  • Takao Asano

    (Okayama University)

  • Yusuke Osaki

    (Waseda University)

Abstract

This paper considers a portfolio allocation problem between a risky asset and an ambiguous asset, and investigates how greater ambiguity aversion influences the optimal proportion invested in the two assets. We derive several sufficient conditions under which greater ambiguity aversion decreases the optimal proportion invested in the ambiguous asset. Furthermore, we consider an international diversification problem as an application and show that ambiguity aversion partially resolves the home bias puzzle.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:annopr:v:284:y:2020:i:1:d:10.1007_s10479-019-03206-1
    DOI: 10.1007/s10479-019-03206-1
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    More about this item

    Keywords

    Uncertainty modelling; Home bias puzzle; Portfolio allocation problem; Smooth ambiguity model; Greater ambiguity aversion;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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