Robust consumption and portfolio choice for time varying investment opportunities

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• 作者：Hening Liu (1)
  
• 关键词：Robust control ; Portfolio choice ; Recursive preferences ; Mean ; reverting ; G11 ; D81 ; C61
• 刊名：Annals of Finance
• 出版年：2010
• 出版时间：October 2010
• 年：2010
• 卷：6
• 期：4
• 页码：435-454
• 全文大小：273KB
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• 作者单位：Hening Liu (1)
  
  1. Accounting and Finance Group, Manchester Business School, University of Manchester, Booth Street West, Manchester, M15 6PB, UK
  
• ISSN：1614-2454

文摘

This paper examines a continuous-time intertemporal consumption and portfolio choice problem for an investor with recursive preferences. The investor worries about model misspecification and seeks robust decision rules. The expected excess return of a risky asset follows a mean-reverting process. I find that whether the concern about model misspecification decreases the total demand for equities largely depends on risk aversion and the attitude toward intertemporal substitution. When the elasticity of intertemporal substitution is about 1 and risk aversion is moderate, the aversion to model uncertainty increases the proportion of wealth invested in equities. The calibration analysis based on detection-error probabilities shows that the quantitative effect of robustness is almost negligible.