Learning, Ambiguity and Life-Cycle Portfolio Allocation
Universidad de Alicante - Faculty of Economic and Business Sciences
October 10, 2008
In the present paper I develop a life-cycle portfolio choice model where agents perceive stock returns to be ambiguous and are ambiguity averse. As in Epstein and Schneider (2005) part of the ambiguity vanishes over time as a consequence of learning over observed returns. The model shows that ambiguity alone can rationalize moderate stock market participation rates and conditional shares with reasonable participation costs but has strongly counterfactual implications for conditional allocations to stocks by age and wealth. When learning is allowed, conditional shares over the life-cycle are instead aligned with the empirical evidence and patterns of stock holdings over the wealth distribution get closer to the data.
Number of Pages in PDF File: 55
Keywords: Portfolio choice, life-cycle, ambiguity, learning
JEL Classification: G11, D83, D91working papers series
Date posted: February 15, 2008 ; Last revised: November 2, 2008
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