Age-dependent robust strategic asset allocation with inflation–deflation hedging demand

Abstract

This study analyzes robust strategic asset allocation under a quadratic security market model with stochastic volatility and inflation rates assuming “age-dependent robust utility” in which relative ambiguity aversion is a decreasing function of age. We show that, unlike homothetic robust utility, age-dependent robust utility cannot be interpreted as homothetic stochastic differential utility. We consider the finite-time consumption-investment problem and derive a linear approximate optimal robust portfolio candidate decomposed into myopic, intertemporal hedging, and inflation–deflation hedging demands. Our numerical analysis of the approximate optimal allocation to the S &P500 shows modest hump-shaped age effects, similar to the results of a previous empirical analysis, and that the upswing is due to the increase in myopic demand, while the downswing is due to the decrease in intertemporal hedging demand.