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Journal of Banking and Finance


Ambiguity aversion;Portofolio optimization;Robust optimization


  1. Jinqing Zhang
  2. Zeyu Jin
  3. Yunbi An


    2. BANKING


      This paper investigates portfolio selection in the presence of
      transaction costs and ambiguity about return predictability. By
      distinguishing between ambiguity aversion to returns and to return
      predictors, we derive the optimal dynamic trading rule in closed form
      within the framework of Gârleanu and Pedersen (2013), using the robust
      optimization method. We characterize its properties and the unique
      mechanism through which ambiguity aversion impacts the optimal robust
      strategy. In addition to the two trading principles documented in
      Gârleanu and Pedersen (2013), our model further implies that the robust
      strategy aims to reduce the expected loss arising from estimation
      errors. Ambiguity-averse investors trade toward an aim portfolio that
      gives less weight to highly volatile return-predicting factors, and
      loads less on the securities that have large and costly positions in the
      existing portfolio. Using data on various commodity futures, we show
      that the robust strategy outperforms the corresponding non-robust
      strategy in out-of-sample tests.


      Vol 79, Tahun 2017


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