Learning, Ambiguity and Life-Cycle Portfolio Allocation

55 Pages Posted: 15 Feb 2008 Last revised: 2 Nov 2008

See all articles by Claudio Campanale

Claudio Campanale

Universidad de Alicante - Faculty of Economic and Business Sciences

Date Written: October 10, 2008

Abstract

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.

Keywords: Portfolio choice, life-cycle, ambiguity, learning

JEL Classification: G11, D83, D91

Suggested Citation

Campanale, Claudio, Learning, Ambiguity and Life-Cycle Portfolio Allocation (October 10, 2008). Available at SSRN: https://ssrn.com/abstract=1092159 or http://dx.doi.org/10.2139/ssrn.1092159

Claudio Campanale (Contact Author)

Universidad de Alicante - Faculty of Economic and Business Sciences ( email )

Germán Edifcio Bernácer - Ground floor
Campus of San Vicente del Raspeig
Alicante, 03080
Spain

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