Details

Autor(en) / Beteiligte

• Jang, Bong-Gyu
• Kim, Taeyoon
• Lee, Seungkyu
• Park, Seyoung

Titel

Ambiguity premium and transaction costs

Ist Teil von

• Economics letters, 2021-10, Vol.207, p.110007, Article 110007

Ort / Verlag

Amsterdam: Elsevier B.V

Erscheinungsjahr

2021

Quelle

Alma/SFX Local Collection

Beschreibungen/Notizen

• We generalize the optimal investment model of an ambiguity averse investor with transaction costs. Along the lines of Maenhout (2004), we first show that ambiguity (or model uncertainty) leads to an increase in effective risk aversion by ambiguity aversion even with transaction costs. We compute the utility cost associated with suboptimal investment decisions, which is the so-called ambiguity premium. We then find that ignoring ambiguity aversion with and without transaction costs generates large ambiguity premia when ambiguity aversion is moderate, and the cost of ignoring it becomes larger with higher ambiguity aversion. This would, thus, still support the importance of ambiguity aversion channel for portfolio choice, even concerning the friction markets. •We develop a tractable workhorse investment model of an ambiguity averse investor with transaction costs.•We show the economic significance of correctly considering ambiguity aversion in the investment.•Overall, ignoring ambiguity aversion with and without transaction costs generates large ambiguity premia.