This study considers a finite-time consumption-investment problem for investors with homothetic robust utility under the quadratic security market model with stochastic volatilities and inflation rates. This leads to a nonlinear nonhomogeneous partial differential equation for indirect utility. We propose a linear approximation method and derive the approximate optimal robust portfolio decomposed into myopic, intertemporal hedging, and inflation-deflation hedging demands. Furthermore, we propose a method for estimating our quadratic security market model that achieves the stability of optimal portfolio estimates. We then apply our estimation method to a two-factor quadratic security market model. Our numerical analysis shows that the market timing effects in the optimal robust allocation are significant and nonlinear, and are mainly due to inflation-deflation hedging demand in addition to myopic demand.
This study analyzes robust strategic asset allocation under a quadratic security market model with stochastic volatility and inflation rates assuming “homothetic age-dependent robust utility” in which relative ambiguity aversion is a decreasing function of age. We consider the finite-time consumption-investment problem and derive a linear approximate optimal robust portfolio decomposed into myopic, intertemporal hedging, and inflation-deflation hedging demands. Our numerical analysis of equity allocations 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 decline in intertemporal hedging demand.
JEL Classification C61 · G11
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