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Optimal Portfolio with Vector Expected Utility

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  • Eric André

    (Aix-Marseille University (Aix-Marseille School of Economics, EHESS & CNRS.)

Abstract

We study the optimal portfolio selected by an investor who conforms to Siniscalchi (2009)’s Vector Expected Utility’s (VEU) axioms and who is ambiguity averse. To this end, we derive a mean-variance preference generalised to ambiguity from the second-order Taylor-Young expansion of the VEU certainty equivalent. We apply this Mean Variance Variability preference to the static two-assets portfolio problem and deduce asset allocation results which extend the mean-variance analysis to ambiguity in the VEU framework. Our criterion has attractive features: it is axiomatically well-founded and analytically tractable, it is therefore well suited for applications to asset pricing as proved by a novel analysis of the home-bias puzzle with two ambiguous assets.

Suggested Citation

  • Eric André, 2013. "Optimal Portfolio with Vector Expected Utility," AMSE Working Papers 1308, Aix-Marseille School of Economics, France, revised 11 Feb 2013.
    • Handle: RePEc:aim:wpaimx:1308
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    More about this item

    Keywords

    Vector Expected Utility; Ambiguity; Portfolio Choice; Home-bias Puzzle.;
    All these keywords.

    JEL classification:

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

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