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Optimal consumption and portfolio choice with ambiguity

Author

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  • Lin, Qian

    (Center for Mathematical Economics, Bielefeld University)

  • Riedel, Frank

    (Center for Mathematical Economics, Bielefeld University)

Abstract

We consider optimal consumption and portfolio choice in the presence of Knightian uncertainty in continuous-time. We embed the problem into the new framework of stochastic calculus for such settings, dealing in particular with the issue of non-equivalent multiple priors. We solve the problem completely by identifying the worst-case measure. Our setup also allows to consider interest rate uncertainty; we show that under some robust parameter constellations, the investor optimally puts all his wealth into the asset market, and does not save or borrow at all.

Suggested Citation

  • 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.
    • Handle: RePEc:bie:wpaper:497
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    References listed on IDEAS

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    More about this item

    Keywords

    Robust Finance; Optimal Portfolio Choice; Knightian Uncertainty; Ambiguity; Model Uncertainty;
    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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