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Optimal Portfolios under Time-Varying Investment Opportunities, Parameter Uncertainty, and Ambiguity Aversion

Published online by Cambridge University Press:  03 June 2019

Thomas Dangl*
Dangl,, Vienna University of Technology Institute of Management Science, Vienna Graduate School of Finance, and Spängler IQAM Invest
Alex Weissensteiner
Weissensteiner,, Free University of Bozen-Bolzano School of Economics and Management
Dangl (corresponding author),


We study the implications of predictability on the optimal asset allocation of ambiguity-averse long-term investors and analyze the term structure of the multivariate risk–return trade-off considering parameter uncertainty. We calibrate the model to real returns of U.S. stocks, long-term bonds, cash, real estate, and gold using the term spread and the dividend–price ratio as additional predictive variables, and we show that over long horizons, the optimal asset allocation is significantly influenced by the covariance structure induced by estimation errors. The ambiguity-averse long-term investor optimally tilts his or her portfolio toward a seemingly inefficient portfolio, which shows maximum robustness against estimation errors.

Research Article
Copyright © Michael G. Foster School of Business, University of Washington 2019

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We thank Jennifer Conrad (the editor) and Victor DeMiguel (the referee) for their great support during the refereeing process. We gratefully acknowledge comments from Nicole Branger, Lorenzo Garlappi, Holger Kraft, Christoph Meinerding, Raman Uppal, and Josef Zechner.


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