A Mean-Preserving Increase in Ambiguity and Portfolio Choices

This article investigates under what conditions an increase in ambiguity reduces demand for an uncertain asset (or raises demand for coinsurance). We find that the comparative statics of ambiguity and of risks have structural similarities under the smooth ambiguity aversion model (Klibanoff, Marinac...

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Bibliographic Details
Published in:The Journal of risk and insurance 2018-12, Vol.85 (4), p.993-1012
Main Authors: Huang, Yi-Chieh, Tzeng, Larry Y.
Format: Article
Language:English
Subjects:
Analysis
Economic models
Risk aversion
Securities analysis
Supply & demand
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Summary:This article investigates under what conditions an increase in ambiguity reduces demand for an uncertain asset (or raises demand for coinsurance). We find that the comparative statics of ambiguity and of risks have structural similarities under the smooth ambiguity aversion model (Klibanoff, Marinacci, and Mukerji, 2005). The determinant condition on ambiguity preferences is analogous to that on risk preferences. However, the comparative statics have fundamental differences under the a-maxmin model (Ghirardato, Maccheroni, and Marinacci, 2004). When relative risk aversion is less than 1, only an increase in ambiguity, which broadens support for an investor's belief in the probability of the return distribution in the manner of a strong increase in risk, can reduce demand for an uncertain asset.
ISSN:0022-4367
1539-6975
DOI:10.1111/jori.12188