Institute of Insurance and Risk Management
Subsite Background

Seminar - Robust Portfolio Choice Under Uncertainty

Details

Seminar - Robust Portfolio Choice Under Uncertainty

 

Date: 19 June 2023

Time: 10:30 - 12:00

Venue: SEK108

Language: English

Speaker: 

  • Dr. Qian LIN 

    Distinguished Research Fellow of Finance, School of Economics and Management, Wuhan University

 

In reality, investors are uncertain about the dynamics of the risky asset returns (e.g., the expected returns and the correlation between the returns of two risky assets). Consequently, investors make robust investment decisions with special concerns on the expected returns and correlations. In this talk, a hierarchical rule for robust investment between two risky assets is given: select the relatively safe asset first and then decide how much to invest in the relatively risky asset to hedge the ambiguity embedded in the relatively safe asset. After introducing criteria for relative riskiness and cross-hedging for investors with a constant relative risk averse (CRRA) utility, we find that a typical investor would equally invest in the two risky assets regardless of their correlation when they are indistinguishable from the riskiness perspective. Furthermore, the investor will take a long or short position on the relatively risky asset if it can work as the cross-hedging instrument due to their correlation; otherwise, it will not be traded at all. These results provide a unified explanation for the observed “under-diversification”, “home bias”, and “portfolioin- ertia”in financial markets from the cross-hedging point of view.