Ambiguity Aversion and Under-diversification

Massimo Guidolin and Hening Liu

No 483, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

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 opportunities. JEL Classification: C61; D81; G11. Keywords: Ambiguity aversion, Bayesian portfolio analysis, CAPM, Smooth ambiguity.

Date: 2013
New Economics Papers: this item is included in nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://repec.unibocconi.it/igier/igi/wp/2013/483.pdf (application/pdf)

Related works:
Journal Article: Ambiguity Aversion and Underdiversification (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:igi:igierp:483

Ordering information: This working paper can be ordered from
https://repec.unibocconi.it/igier/igi/

Access Statistics for this paper

More papers in Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University via Rontgen, 1 - 20136 Milano (Italy).
Bibliographic data for series maintained by ().