Business Intelligence

Portfolio And Consumption Decisions Under Ambiguity For Regime Switching Mean Returns

Free registration required

Executive Summary

This paper examines a continuous-time inter-temporal consumption and portfolio choice problem for an ambiguity-averse investor with multiple priors when the expected return of a risky asset is unobservable and follows a hidden Markov chain. The investor's beliefs over investment opportunities are represented by a set of priors over the process governing the dynamics of the conditional estimates of the unobservable state. The investor is assumed to have Chen and Epstein's (2002) recursive multiple priors utility preferences. Using the Malliavin calculus technique, the authors characterize the optimal consumption and portfolio rules explicitly in terms of the Malliavin derivatives and stochastic integrals.

  • Format: PDF
  • Size: 376.58 KB