2023/06/23 by Julian Hölzermann, Hölzermann, Julian
Economics, Econometrics and Finance · #91G10 #91G30 #Capital Investment and Risk Analysis #Economic theories and models #FOS: Economics and business #Portfolio Management (q-fin.PM) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.2306.13343
openalex publication_date 2023/06/23 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
This paper studies dynamic asset allocation with interest rate risk and several sources of ambiguity. The market consists of a risk-free asset, a zero-coupon bond (both determined by a Vasicek model), and a stock. There is ambiguity about the risk premia, the volatilities, and the correlation. The investor's preferences display both risk aversion and ambiguity aversion. The optimal investment problem admits a closed-form solution. The solution shows that the ambiguity only affects the speculative motives of the investor, representing a hedge against the ambiguity, but not the hedging of interest rate risk. An implementation of the optimal investment strategy shows that ambiguity aversion helps to tame the highly leveraged portfolios neglecting ambiguity and leads to strategies that are more in line with popular investment advice.