Ambiguity, ambiguity aversion and stores of value: The case of Argentina

Eduardo Ariel Corso

doi:10.1080/23322039.2014.947001

Abstract

AbstractWe study the household portfolio allocation in an economy with a history of nominal anchor volatility. Applying smooth ambiguity preferences to a static portfolio choice problem, we rationalize two facts about the Argentine experience of the last 20 years: the dollarization of household financial assets and its bias towards investment real estate as a means of preserving the real value of wealth. We find that ambiguity explains portfolio dollarization. In addition, ambiguity aversion reduces the demand for assets denominated in US dollars and increases the demand for investment real estate.

Highlights

In 1921, Frank Knight proposed the classic distinction between risk and uncertainty
Eduardo Ariel Corso is a senior analyst of Economic Research at the Central Bank of Argentina
Calibration 1 In the first calibration, we study the effects of ambiguity on asset dollarization when the currency board was in effect

Summary

Introduction

In 1921, Frank Knight proposed the classic distinction between risk and uncertainty. Knight’s concept of risk refers to a situation in which agents can assign probability values univocally, said values being determined either objectively or subjectively. The second response is households’ demand for investment real estate and external assets as stores of value during the period 2003–2012 (Figure 2 and Table 2) These facts can be rationalized by assuming only two feasible distributions in set M. We sustain that if the agent assigns priors (no matter what process generates it) to the feasibility of subjective distributions μi, some values of these priors can have significant effects on the relative asset holdings In this sense, the aim of the proposed calibration exercises is to show that different values of priors, as well as degrees of ambiguity aversion, can explain specific aspects of asset allocation in Argentina. The optimal demand for term deposits denominated in local currency is zero for every value of priors considered

Results

Figures and

Conclusions