Optimal Portfolios under Time-Varying Investment Opportunities, Parameter Uncertainty and Ambiguity Aversion

51 Pages Posted: 12 Dec 2016 Last revised: 31 Dec 2018

See all articles by Thomas Dangl

Thomas Dangl

Vienna University of Technology

Alex Weissensteiner

Free University of Bolzano Bozen

Date Written: December 23, 2018

Abstract

We study the implications of predictability on the optimal asset allocation of ambiguity-averse long-term investors and analyze the term structure of the multivariate risk-return trade-off considering parameter uncertainty. We calibrate the model to real returns of US stocks, long-term bonds, cash, real estate, and gold using the term spread and the dividend-price ratio as additional predictive variables, and we show that over long horizons the optimal asset allocation is significantly influenced by the covariance structure induced by estimation errors. The ambiguity-averse long-term investor optimally tilts her portfolio toward a seemingly inefficient portfolio, which shows maximum robustness against estimation errors.

Keywords: Portfolio Choice, Predictability, Parameter Uncertainty, Ambiguity Aversion, Strategic Asset Allocation

JEL Classification: G11

Suggested Citation

Dangl, Thomas and Weissensteiner, Alex, Optimal Portfolios under Time-Varying Investment Opportunities, Parameter Uncertainty and Ambiguity Aversion (December 23, 2018). Available at SSRN: https://ssrn.com/abstract=2883768 or http://dx.doi.org/10.2139/ssrn.2883768

Thomas Dangl

Vienna University of Technology ( email )

Theresianumgasse 27
Vienna, A-1040
Austria

Alex Weissensteiner (Contact Author)

Free University of Bolzano Bozen ( email )

Universitätsplatz 1
Bolzano, 39100
+39 0471 013496 (Phone)

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