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Ambiguity in asset pricing and portfolio choice: a review of the literature

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Abstract

We survey the literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices. This ambiguity literature has led to a number of significant advances in our ability to rationalize empirical features of asset returns and portfolio decisions, such as the failure of the two-fund separation theorem in portfolio decisions, the modest exposure to risky securities observed for a majority of investors, the home equity preference in international portfolio diversification, the excess volatility of asset returns, the equity premium and the risk-free rate puzzles, and the occurrence of trading break-downs.

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Authors and Affiliations

  1. Department of Finance and IGIER, Bocconi University, Milan, Italy

    Massimo Guidolin

  2. CAIR, Manchester Business School, Manchester, UK

    Massimo Guidolin

  3. Banque de France, Paris, France

    Francesca Rinaldi

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  1. Massimo Guidolin
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  2. Francesca Rinaldi
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Correspondence to Massimo Guidolin.

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Guidolin, M., Rinaldi, F. Ambiguity in asset pricing and portfolio choice: a review of the literature. Theory Decis 74, 183–217 (2013). https://doi.org/10.1007/s11238-012-9343-2

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