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 “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