Equilibrium Portfolio Selection for Smooth Ambiguity Preferences
Optimization and Control
2023-02-17 v1
Abstract
This paper investigates the equilibrium portfolio selection for smooth ambiguity preferences in a continuous-time market. The investor is uncertain about the risky asset's drift term and updates the subjective belief according to the Bayesian rule. Two versions of the verification theorem are established and an equilibrium strategy can be decomposed into a myopic demand and two hedging demands. When the prior is Gaussian, the closed-form equilibrium solution is obtained. A puzzle in the numerical results is interpreted via an alternative representation of the smooth ambiguity preferences.
Keywords
Cite
@article{arxiv.2302.08181,
title = {Equilibrium Portfolio Selection for Smooth Ambiguity Preferences},
author = {Guohui Guan and Zongxia Liang and Jianming Xia},
journal= {arXiv preprint arXiv:2302.08181},
year = {2023}
}