We examine asset allocation decisions under smooth ambiguity aversion when an investor has a prior degree of belief in an asset pricing model (e.g., the domestic CAPM). Different from the Bayesian portfolio approach, in our model the investor separately relies on the conditional distribution of returns and on the posterior over uncertain parameters to make asset allocation decisions, rather than on the predictive distribution of returns that integrates priors and likelihood information in a single distribution. This is a key feature implied by smooth ambiguity preferences. We find that in the perspective of US investors,ambiguity aversion can generate strong home bias in their equity holdings, regardless of their belief in the domestic CAPM or of their degree of risk aversion. Our results extend and become stronger under regime-switching investment opportunities
Ambiguity aversion and underdiversification
GUIDOLIN, MASSIMO;
2016
Abstract
We examine asset allocation decisions under smooth ambiguity aversion when an investor has a prior degree of belief in an asset pricing model (e.g., the domestic CAPM). Different from the Bayesian portfolio approach, in our model the investor separately relies on the conditional distribution of returns and on the posterior over uncertain parameters to make asset allocation decisions, rather than on the predictive distribution of returns that integrates priors and likelihood information in a single distribution. This is a key feature implied by smooth ambiguity preferences. We find that in the perspective of US investors,ambiguity aversion can generate strong home bias in their equity holdings, regardless of their belief in the domestic CAPM or of their degree of risk aversion. Our results extend and become stronger under regime-switching investment opportunitiesFile | Dimensione | Formato | |
---|---|---|---|
Guidolin and Liu 2017 JFQA final.pdf
non disponibili
Tipologia:
Pdf editoriale (Publisher's layout)
Licenza:
NON PUBBLICO - Accesso privato/ristretto
Dimensione
814.19 kB
Formato
Adobe PDF
|
814.19 kB | Adobe PDF | Visualizza/Apri |
I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.