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Ambiguity made easier

Author

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  • Matteo Del Vigna

    (Dipartimento di Statistica e Matematica Applicata all'Economia, Universita' di Pisa & CEREMADE, Universite' Paris-Dauphine)

Abstract

In this paper we review some well-known simple models for portfolio selection under Knightian uncertainty, also known as ambiguity, and we compute a number of explicit optimal portfolio rules using elementary mathematical tools. In the case of a single period financial market, new results arise for an agent who is risk neutral and smoothly ambiguity averse, for a loss averse and smoothly ambiguity averse agent, for a Mean-Variance and alpha-Maxmin Expected Utility agent. In a continuous time setting, we are able to recover some existing results on optimal investment strategies employing trivial stochastic analysis and avoiding the complicated BSDE machinery.

Suggested Citation

  • Matteo Del Vigna, 2011. "Ambiguity made easier," Working Papers - Mathematical Economics 2011-07, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:flo:wpaper:2011-07
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Knightian uncertainty; Maxmin Expected Utility; smooth ambiguity aversion; loss aversion;
    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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