Horizon-unbiased Investment with Ambiguity
Qian Lin, Xianming Sun, Chao Zhou
TL;DR
This paper develops a model for dynamic portfolio choice under ambiguity without a fixed investment horizon, using a robust forward performance process to determine optimal strategies and worst-case scenarios.
Contribution
It introduces a novel approach to investment under ambiguity by integrating robust forward performance with market risk and utility risk premiums.
Findings
Market risk premium and utility risk premium jointly influence trading decisions.
Closed-form solutions for optimal strategies under CRRA preferences.
Identification of worst-case scenarios for asset return and volatility.
Abstract
In the presence of ambiguity on the driving force of market randomness, we consider the dynamic portfolio choice without any predetermined investment horizon. The investment criteria is formulated as a robust forward performance process, reflecting an investor's dynamic preference. We show that the market risk premium and the utility risk premium jointly determine the investors' trading direction and the worst-case scenarios of the risky asset's mean return and volatility. The closed-form formulas for the optimal investment strategies are given in the special settings of the CRRA preference.
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Taxonomy
TopicsStochastic processes and financial applications · Financial Markets and Investment Strategies · Capital Investment and Risk Analysis