Download this Paper Open PDF in Browser

Optimal Consumption and Portfolio Choice with Ambiguity

42 Pages Posted: 12 Jan 2014 Last revised: 5 Feb 2014

Qian Lin

Bielefeld University - Center for Mathematical Economics

Frank Riedel

Bielefeld University - Center for Mathematical Economics

Date Written: January 15, 2014

Abstract

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

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

Qian Lin (Contact Author)

Bielefeld University - Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

Frank Riedel

Bielefeld University - Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

Paper statistics

Downloads
194
Rank
130,997
Abstract Views
889