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  1. Annals of Finance
  2. Annals of Finance : Volume 11
  3. Annals of Finance : Volume 11, Issue 1, February 2015
  4. Dynamic portfolio selection with mispricing and model ambiguity
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Annals of Finance : Volume 13
Annals of Finance : Volume 12
Annals of Finance : Volume 11
Annals of Finance : Volume 11, Issue 3-4, November 2015
Annals of Finance : Volume 11, Issue 2, May 2015
Annals of Finance : Volume 11, Issue 1, February 2015
Asset pricing theory for two price economies
Dynamic portfolio selection with mispricing and model ambiguity
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Dynamic portfolio selection with mispricing and model ambiguity

Content Provider Springer Nature Link
Author Yi, Bo Viens, Frederi Law, Baron Li, Zhongfei
Copyright Year 2014
Abstract We investigate optimal portfolio selection problems with mispricing and model ambiguity under a financial market which contains a pair of mispriced stocks. We assume that the dynamics of the pair satisfies a “cointegrated system” advanced by Liu and Timmermann in a 2013 manuscript. The investor hopes to exploit the temporary mispricing by using a portfolio strategy under a utility function framework. Furthermore, she is ambiguity-averse and has a specific preference for model ambiguity robustness. The explicit solution for such a robust optimal strategy, and its value function, are derived. We analyze these robust strategies with mispricing in two cases: observed and unobserved mean-reverting stochastic risk premium. We show that the mispricing and model ambiguity have completely distinct impacts on the robust optimal portfolio selection, by comparing the utility losses. We also find that the ambiguity-averse investor who ignores the mispricing or the model ambiguity, suffers a substantially larger utility loss if the risk premium is unobserved, compared to when it is observed.
Starting Page 37
Ending Page 75
Page Count 39
File Format PDF
ISSN 16142446
Journal Annals of Finance
Volume Number 11
Issue Number 1
e-ISSN 16142454
Language English
Publisher Springer Berlin Heidelberg
Publisher Date 2014-06-08
Publisher Place Berlin, Heidelberg
Access Restriction One Nation One Subscription (ONOS)
Subject Keyword Portfolio selection Model ambiguity Mispricing Stochastic risk premium Robust control Utility maximization Finance/Investment/Banking Macroeconomics/Monetary Economics Quantitative Finance
Content Type Text
Resource Type Article
Subject Finance
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