Publications

Journal Article

The author presents a new approach to the dynamic portfolio and consumption problem of an investor who worries about model uncertainty (in addition to market risk) and seeks robust decisions along the lines of Anderson, Hansen and Sargent (2000).

In accordance with maximum expected utility, a robust investor insures against some endogenous worst cases. The author first shows that robustness dramatically decreases the demand for equities and is observationally equivalent to recursive preferences when removing wealth effects.

Second, when investment opportunities are stochastic, robustness leads to an additional hedging-type asset demand, even for logarithmic utility. Finally, robustness increases the equilibrium equity premium and lowers the risk free rate.