Optimal Portfolios under Time-Varying Investment Opportunities, Parameter Uncertainty and Ambiguity Aversion
51 Pages Posted: 12 Dec 2016 Last revised: 31 Dec 2018
Date Written: December 23, 2018
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
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