A Mean‐Preserving Increase in Ambiguity and Portfolio Choices

20 Pages Posted: 16 Nov 2018

See all articles by Yi‐Chieh Huang

Yi‐Chieh Huang

Feng Chia University

Larry Y. Tzeng

National Taiwan University - Department of Finance

Date Written: December 2018

Abstract

This article investigates under what conditions an increase in ambiguity reduces demand for an uncertain asset (or raises demand for coinsurance). We find that the comparative statics of ambiguity and of risks have structural similarities under the smooth ambiguity aversion model (Klibanoff, Marinacci, and Mukerji, ([Klibanoff, P., 2005])). The determinant condition on ambiguity preferences is analogous to that on risk preferences. However, the comparative statics have fundamental differences under the ‐maxmin model (Ghirardato, Maccheroni, and Marinacci, ([Ghirardato, P., 2004])). When relative risk aversion is less than 1, only an increase in ambiguity, which broadens support for an investor's belief in the probability of the return distribution in the manner of a strong increase in risk, can reduce demand for an uncertain asset.

Suggested Citation

Huang, Yi‐Chieh and Tzeng, Larry, A Mean‐Preserving Increase in Ambiguity and Portfolio Choices (December 2018). Journal of Risk and Insurance, Vol. 85, Issue 4, pp. 993-1012, 2018, Available at SSRN: https://ssrn.com/abstract=3285374 or http://dx.doi.org/10.1111/jori.12188

Yi‐Chieh Huang (Contact Author)

Feng Chia University ( email )

100 Wenhwa Road
Talchung
Taiwan

Larry Tzeng

National Taiwan University - Department of Finance ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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