IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1904.09379.html
   My bibliography  Save this paper

Horizon-unbiased Investment with Ambiguity

Author

Listed:
  • Qian Lin
  • Xianming Sun
  • Chao Zhou

Abstract

In the presence of ambiguity on the driving force of market randomness, we consider the dynamic portfolio choice without any predetermined investment horizon. The investment criteria is formulated as a robust forward performance process, reflecting an investor's dynamic preference. We show that the market risk premium and the utility risk premium jointly determine the investors' trading direction and the worst-case scenarios of the risky asset's mean return and volatility. The closed-form formulas for the optimal investment strategies are given in the special settings of the CRRA preference.

Suggested Citation

  • Qian Lin & Xianming Sun & Chao Zhou, 2019. "Horizon-unbiased Investment with Ambiguity," Papers 1904.09379, arXiv.org.
    • Handle: RePEc:arx:papers:1904.09379
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1904.09379
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hening Liu, 2011. "Dynamic portfolio choice under ambiguity and regime switching mean returns," Post-Print hal-00781344, HAL.
    2. Larry G. Epstein & Shaolin Ji, 2013. "Ambiguous Volatility and Asset Pricing in Continuous Time," The Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1740-1786.
    3. Tahir Choulli & Christophe Stricker & Jia Li, 2007. "Minimal Hellinger martingale measures of order q," Finance and Stochastics, Springer, vol. 11(3), pages 399-427, July.
    4. Alghalith, Moawia, 2012. "Forward dynamic utility functions: A new model and new results," European Journal of Operational Research, Elsevier, vol. 223(3), pages 842-845.
    5. Liu, Hening, 2011. "Dynamic portfolio choice under ambiguity and regime switching mean returns," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 623-640, April.
    6. Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," The Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 951-983.
    7. Hui Chen & Nengjiu Ju & Jianjun Miao, 2014. "Dynamic Asset Allocation with Ambiguous Return Predictability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 799-823, October.
    8. Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," The Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 41-81, January.
    9. Levon Avanesyan & Mykhaylo Shkolnikov & Ronnie Sircar, 2018. "Construction of Forward Performance Processes in Stochastic Factor Models and an Extension of Widder's Theorem," Papers 1805.04535, arXiv.org.
    10. Epstein, Larry G. & Ji, Shaolin, 2014. "Ambiguous volatility, possibility and utility in continuous time," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 269-282.
    11. Luo, Yulei & Nie, Jun & Young, Eric R., 2014. "Model uncertainty and intertemporal tax smoothing," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 289-314.
    12. Bandi, Federico M. & Renò, Roberto, 2012. "Time-varying leverage effects," Journal of Econometrics, Elsevier, vol. 169(1), pages 94-113.
    13. Yu, Jun, 2012. "A semiparametric stochastic volatility model," Journal of Econometrics, Elsevier, vol. 167(2), pages 473-482.
    14. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    15. Escobar, Marcos & Ferrando, Sebastian & Rubtsov, Alexey, 2018. "Dynamic derivative strategies with stochastic interest rates and model uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 49-71.
    16. Peter Bossaerts & Paolo Ghirardato & Serena Guarnaschelli & William R. Zame, 2010. "Ambiguity in Asset Markets: Theory and Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1325-1359, April.
    17. Sergey Nadtochiy & Michael Tehranchi, 2017. "Optimal Investment For All Time Horizons And Martin Boundary Of Space-Time Diffusions," Mathematical Finance, Wiley Blackwell, vol. 27(2), pages 438-470, April.
    18. Lin, Qian & Riedel, Frank, 2014. "Optimal consumption and portfolio choice with ambiguity," Center for Mathematical Economics Working Papers 497, Center for Mathematical Economics, Bielefeld University.
    19. Wang, Neng, 2009. "Optimal consumption and asset allocation with unknown income growth," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 524-534, May.
    20. Guidolin, Massimo & Liu, Hening, 2016. "Ambiguity Aversion and Underdiversification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(4), pages 1297-1323, August.
    21. Wing Fung Chong & Gechun Liang, 2018. "Optimal investment and consumption with forward preferences and uncertain parameters," Papers 1807.01186, arXiv.org, revised Nov 2023.
    22. Henderson, Vicky & Hobson, David, 2007. "Horizon-unbiased utility functions," Stochastic Processes and their Applications, Elsevier, vol. 117(11), pages 1621-1641, November.
    23. Omori, Yasuhiro & Chib, Siddhartha & Shephard, Neil & Nakajima, Jouchi, 2007. "Stochastic volatility with leverage: Fast and efficient likelihood inference," Journal of Econometrics, Elsevier, vol. 140(2), pages 425-449, October.
    24. Michail Anthropelos, 2011. "Forward Exponential Performances: Pricing and Optimal Risk Sharing," Papers 1109.3908, arXiv.org, revised Mar 2013.
    25. Zeng, Yan & Li, Danping & Chen, Zheng & Yang, Zhou, 2018. "Ambiguity aversion and optimal derivative-based pension investment with stochastic income and volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 88(C), pages 70-103.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lin, Qian & Sun, Xianming & Zhou, Chao, 2020. "Horizon-unbiased investment with ambiguity," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    2. Jeleva, Meglena & Tallon, Jean-Marc, 2016. "Ambiguïté, comportements et marchés financiers," L'Actualité Economique, Société Canadienne de Science Economique, vol. 92(1-2), pages 351-383, Mars-Juin.
    3. Qian Lin & Frank Riedel, 2021. "Optimal consumption and portfolio choice with ambiguous interest rates and volatility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(3), pages 1189-1202, April.
    4. Massimo Guidolin & Francesca Rinaldi, 2013. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Theory and Decision, Springer, vol. 74(2), pages 183-217, February.
    5. Horváth, Ferenc, 2017. "Essays on robust asset pricing," Other publications TiSEM e54d7b33-1f27-4b0e-9f84-f, Tilburg University, School of Economics and Management.
    6. Yulei Luo, 2017. "Robustly Strategic Consumption–Portfolio Rules with Informational Frictions," Management Science, INFORMS, vol. 63(12), pages 4158-4174, December.
    7. Guidolin, Massimo & Liu, Hening, 2016. "Ambiguity Aversion and Underdiversification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(4), pages 1297-1323, August.
    8. Mao, Jie & Shen, Guanxiong & Yan, Jingzhou, 2023. "A continuous-time macro-finance model with Knightian uncertainty," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    9. Gonçalo Faria & João Correia-da-Silva, 2016. "Is stochastic volatility relevant for dynamic portfolio choice under ambiguity?," The European Journal of Finance, Taylor & Francis Journals, vol. 22(7), pages 601-626, May.
    10. Wing Fung Chong & Gechun Liang, 2018. "Optimal investment and consumption with forward preferences and uncertain parameters," Papers 1807.01186, arXiv.org, revised Nov 2023.
    11. Wei, Pengyu & Yang, Charles & Zhuang, Yi, 2023. "Robust consumption and portfolio choice with derivatives trading," European Journal of Operational Research, Elsevier, vol. 304(2), pages 832-850.
    12. Wei Wang & Qianyan Li & Quan Li & Song Xu, 2023. "Robust Optimal Investment Strategies with Exchange Rate Risk and Default Risk," Mathematics, MDPI, vol. 11(6), pages 1-17, March.
    13. Lin, Qian & Luo, Yulei & Sun, Xianming, 2022. "Robust investment strategies with two risky assets," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    14. Claus Munk & Alexey Rubtsov, 2014. "Portfolio management with stochastic interest rates and inflation ambiguity," Annals of Finance, Springer, vol. 10(3), pages 419-455, August.
    15. Haijun Wang & L. Steven Hou, 2015. "Robust Consumption and Portfolio Choice with Habit Formation, the Spirit of Capitalism and Recursive Utility," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 393-416, November.
    16. Rubtsov, Alexey, 2016. "Model misspecification and pricing of illiquid claims," Finance Research Letters, Elsevier, vol. 18(C), pages 242-249.
    17. Luo, Yulei & Nie, Jun & Wang, Haijun, 2022. "Ignorance, pervasive uncertainty, and household finance," Journal of Economic Theory, Elsevier, vol. 199(C).
    18. Meyer, Steffen & Uhr, Charline, 2024. "Ambiguity and private investors’ behavior after forced fund liquidations," Journal of Financial Economics, Elsevier, vol. 156(C).
    19. Chong, Wing Fung, 2019. "Pricing and hedging equity-linked life insurance contracts beyond the classical paradigm: The principle of equivalent forward preferences," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 93-107.
    20. Agarwal, Vikas & Arisoy, Y. Eser & Naik, Narayan Y., 2017. "Volatility of aggregate volatility and hedge fund returns," Journal of Financial Economics, Elsevier, vol. 125(3), pages 491-510.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1904.09379. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.