Abstract
This paper analyzes the optimal consumption and portfolio choice problem for an ambiguity averse investor who has access to the stock and derivatives markets with recursive preferences. The stock process follows a stochastic volatility jump-diffusion model and the investor can have different levels of ambiguity about diffusion risks and the jump risk, respectively. We obtain an analytical solution which is exact when the investor has unit elasticity of intertemporal substitution of consumption, and approximate otherwise. We find that optimal exposures to diffusion risks and to the jump risk are significantly affected by the ambiguity aversion about the corresponding risk factors in the complete market. However, the optimal stock investment is insensitive to the ambiguity aversion about the jump risk in the incomplete market. We also find that considering ambiguity aversion with respect to diffusion risks and participating in the derivatives markets are essential to reduce the potential welfare loss, while the impact of ignoring the jump ambiguity is negligible.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call