Life-cycle Asset Allocation of Ambiguity Averse Investor: Habit Formation and Term Life Insurance


Speaker:Arie E. Gozluklu, University of Warwick
Date: Tuesday 6 February 2018
Time: 1:45 pm
Location: Pearson Teaching Room, Building: one

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This paper studies a life-cycle consumption and asset allocation problem introducing habit formation preferences, bequest motive and demand for term life insurance. We model an investor not only as risk-averse but also averse to ambiguity about stock returns in a max-min expected utility framework. Our key findings are, but not limited to: (i) fraction of wealth allocated in stocks is negatively correlated with the degree of ambiguity aversion and follows a hump-shaped profile over the life cycle, (ii) the demand for term life insurance increases with ambiguity aversion while it decreases substantially with higher degrees of habit formation. Other features of the model such as subjective survival belief and borrowing option also affect investor’s decisions in interesting ways.