{"title":"Optimal payoffs under smooth ambiguity","authors":"An Chen , Steven Vanduffel , Morten Wilke","doi":"10.1016/j.ejor.2024.08.008","DOIUrl":null,"url":null,"abstract":"<div><div>We study optimal payoff choice for an investor in a one-period model under smooth ambiguity preferences, also called <em>KMM preferences</em> as proposed by Klibanoff et al. (2005). In contrast to the existing literature on optimal asset allocation for a KMM investor in a one-period model, we also allow payoffs that are non-linear in the market asset. Our contribution is fourfold. First, we characterize and derive the optimal payoff under KMM preferences. Second, we demonstrate that a KMM investor solves an equivalent problem to an investor under <em>classical subjective expected utility</em> (CSEU) with adjusted second-order probabilities. Third, we show that a KMM investor with exponential ambiguity attitude implicitly maximizes CSEU utility under the ‘worst-case’ second-order probabilities determined by his ambiguity aversion. Fourth, we reveal that optimal payoffs under ambiguity are not necessarily monotonically increasing in the market asset, which we illustrate using a log-normal market asset under drift and volatility uncertainty.</div></div>","PeriodicalId":55161,"journal":{"name":"European Journal of Operational Research","volume":null,"pages":null},"PeriodicalIF":6.0000,"publicationDate":"2024-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"European Journal of Operational Research","FirstCategoryId":"91","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S037722172400626X","RegionNum":2,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"OPERATIONS RESEARCH & MANAGEMENT SCIENCE","Score":null,"Total":0}
引用次数: 0
Abstract
We study optimal payoff choice for an investor in a one-period model under smooth ambiguity preferences, also called KMM preferences as proposed by Klibanoff et al. (2005). In contrast to the existing literature on optimal asset allocation for a KMM investor in a one-period model, we also allow payoffs that are non-linear in the market asset. Our contribution is fourfold. First, we characterize and derive the optimal payoff under KMM preferences. Second, we demonstrate that a KMM investor solves an equivalent problem to an investor under classical subjective expected utility (CSEU) with adjusted second-order probabilities. Third, we show that a KMM investor with exponential ambiguity attitude implicitly maximizes CSEU utility under the ‘worst-case’ second-order probabilities determined by his ambiguity aversion. Fourth, we reveal that optimal payoffs under ambiguity are not necessarily monotonically increasing in the market asset, which we illustrate using a log-normal market asset under drift and volatility uncertainty.
期刊介绍:
The European Journal of Operational Research (EJOR) publishes high quality, original papers that contribute to the methodology of operational research (OR) and to the practice of decision making.