Robust Portfolio Choice with Uncertainty About Jump and Diffusion Risk

43 Pages Posted: 11 Jan 2012 Last revised: 25 Apr 2012

See all articles by Linda Sandris Larsen

Linda Sandris Larsen

Copenhagen Business School

Nicole Branger

University of Muenster - Finance Center Muenster

Date Written: April 25, 2012

Abstract

We analyze the portfolio planning problem of an ambiguity averse investor. The stock follows a jump-diffusion process, and there is ambiguity about the drift of the stock and the intensity of jumps. The consequences of ambiguity with respect to jump and diffusion risk are by no means the same. In an incomplete market, it is mainly ambiguity about one of the two risk factors which drives the optimal stock weight, and the utility loss is largest if this ambiguity is ignored. Furthermore, we show that the loss from market incompleteness is decreasing in the level of ambiguity.

Keywords: ambiguity, jump-diffusion model, robust control, utility loss, market completeness

JEL Classification: G11

Suggested Citation

Larsen, Linda Sandris and Branger, Nicole, Robust Portfolio Choice with Uncertainty About Jump and Diffusion Risk (April 25, 2012). Available at SSRN: https://ssrn.com/abstract=1982964 or http://dx.doi.org/10.2139/ssrn.1982964

Linda Sandris Larsen (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3, A5
Frederiksberg, 2000
Denmark

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

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