42 Pages Posted: 12 Jan 2014 Last revised: 5 Feb 2014
Date Written: January 15, 2014
We consider optimal consumption and portfolio choice in the presence of Knightian uncertainty in continuous time. We embed the problem into the new framework of stochastic calculus for such settings, dealing in particular with the issue of non-equivalent multiple priors. We solve the problem completely by identifying the worst-case measure. Our setup also allows to consider interest rate uncertainty; we show that under some robust parameter constellations, the investor optimally puts all his wealth into the asset market, and does not save or borrow at all.
Keywords: Robust Finance, Optimal Portfolio Choice, Knightian Uncertainty, Model Uncertainty, Ambiguity
JEL Classification: G11, D81
Suggested Citation: Suggested Citation
Lin, Qian and Riedel, Frank, Optimal Consumption and Portfolio Choice with Ambiguity (January 15, 2014). Institute of Mathematical Economics Working Paper No. 497. Available at SSRN: https://ssrn.com/abstract=2377452 or http://dx.doi.org/10.2139/ssrn.2377452