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Optimal portfolio with vector expected utility

Abstract : We study the optimal portfolio selected by an investor who conforms to Siniscalchi (2009)'s Vector Expected Utility's (VEU) axioms and who is ambiguity averse. To this end, we derive a mean-variance preference generalised to ambiguity from the second-order Taylor-Young expansion of the VEU certainty equivalent. We apply this Mean-Variance Variability preference to the static two-assets portfolio problem and deduce asset allocation results which extend the mean-variance analysis to ambiguity in the VEU framework. Our criterion has attractive features: it is axiomatically well-founded and analytically tractable, it is therefore well suited for applications to asset pricing as proved by a novel analysis of the home-bias puzzle with two ambiguous assets.
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Submitted on : Wednesday, February 22, 2017 - 4:16:07 PM
Last modification on : Thursday, November 4, 2021 - 11:58:07 AM

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Eric André. Optimal portfolio with vector expected utility. Mathematical Social Sciences, Elsevier, 2014, 69 (C), pp.50--62. ⟨10.1016/j.mathsocsci.2014.02.001⟩. ⟨hal-01474246⟩

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