TY - JOUR
T1 - Life-cycle asset allocation with ambiguity aversion and learning
AU - Peijnenburg, Kim
N1 - Publisher Copyright:
Copyright © Michael G. Foster School of Business, University of Washington 2018.
PY - 2018/10/1
Y1 - 2018/10/1
N2 - Ambiguity and learning about the equity premium can simultaneously explain the low fraction of financial wealth allocated to stocks over the life cycle and the stock market participation puzzle. Individuals are ambiguous about the size of the equity premium and are averse to this ambiguity, resulting in lower stock allocations over the life cycle, consistent with the data. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity leads to underdiversification, home bias, lower Sharpe ratios, and higher savings. Similar results cannot be obtained by assuming higher risk aversion.
AB - Ambiguity and learning about the equity premium can simultaneously explain the low fraction of financial wealth allocated to stocks over the life cycle and the stock market participation puzzle. Individuals are ambiguous about the size of the equity premium and are averse to this ambiguity, resulting in lower stock allocations over the life cycle, consistent with the data. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity leads to underdiversification, home bias, lower Sharpe ratios, and higher savings. Similar results cannot be obtained by assuming higher risk aversion.
U2 - 10.1017/S0022109017001144
DO - 10.1017/S0022109017001144
M3 - Article
AN - SCOPUS:85054685996
SN - 0022-1090
VL - 53
SP - 1963
EP - 1994
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 5
ER -