Qian Lin（林乾）,Xianming Sun, Chao Zhou

Publication:

Journal of Economic Dynamics and Control

Abstract:

In the presence of ambiguity about the driving force of market randomness, we consider a dynamic portfolio choice problem without any predetermined investment horizon. The investment criterion is formulated as a robust forward performance process, reflecting an investor’s dynamic preference adapted to the market evolution. We show that the market risk premium and the utility risk premium jointly determine the investors’ trading direction and the worst-case scenarios of the risky asset’s mean return and volatility. The closed-form solution for the optimal investment strategies is given in the special settings of the constant relative risk aversion (CRRA) preference. The resulting portfolio strategies highlight the effect of ambiguity on nonparticipation in the risky asset market from the forward performance point of view.

link:https://doi.org/10.1016/j.jedc.2020.103896