Optimal Portfolios under Time-Varying Investment Opportunities, Parameter Uncertainty, and Ambiguity Aversion. (June 2020)

• Record Type: Journal Article
• Authors: Dangl, Thomas; Weissensteiner, Alex
• Is Part Of: Journal of financial and quantitative analysis. Volume 55:Number 4(2020)
• Page Start: 1163
• Page End: 1198
• Publication Date: 2020-06
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109019000425
• Languages: English
• ISSNs: 0022-1090

Abstract

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 U.S. 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 his or her portfolio toward a seemingly inefficient portfolio, which shows maximum robustness against estimation errors.