Life-Cycle Asset Allocation with Ambiguity Aversion and Learning

No 967, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: I show that ambiguity (Knightian uncertainty) and learning about the equity premium can simultane- ously explain the low fraction of financial wealth allocated to stocks over the life cycle as well as the stock market participation puzzle. I assume that individuals are ambiguous about the size of the equity premium and are averse with respect to this ambiguity, which results in a lower optimal allocation to stocks over the life cycle. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity aversion leads to higher saving rates.

Date: 2014
New Economics Papers: this item is included in nep-dge and nep-upt
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Journal Article: Life-Cycle Asset Allocation with Ambiguity Aversion and Learning (2018)
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More papers in 2014 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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