Life-cycle asset allocation with ambiguity aversion and learning

Research output: Contribution to journalArticleScientificpeer-review

19 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)1963-1994
Number of pages32
JournalJournal of Financial and Quantitative Analysis
Volume53
Issue number5
DOIs
Publication statusPublished - 1 Oct 2018
Externally publishedYes

Fingerprint

Dive into the research topics of 'Life-cycle asset allocation with ambiguity aversion and learning'. Together they form a unique fingerprint.

Cite this