Università della Svizzera italiana

A note on robustness in Merton's model of intertemporal consumption

Trojani, Fabio ; Vanini, Paolo

The paper presents a robust version of a simple two-assets Merton's (1969) model where the optimal choices and the implied shadow market prices of risk for a representative robust decision maker (RDM) can be easily described. With the exeption of the log utility case, precautionary behaviour is induced in the optimal consumption-investment rules through a substitution of investment in risky...

Università della Svizzera italiana

Robustness and ambiguity aversion in general equilibrium

Trojani, Fabio ; Vanini, Paolo

In: Review of Finance, 2004, vol. 8, no. 2, p. 279-324

We analyze the empirical predictions arising from settings of ambiguity aversion in intertemporal heterogenous agents economies. We study equilibria for two tractable wealth-homothetic settings of ambiguity aversion in continuous time. Such settings are motivated by a different robust control optimization problem. We show that ambiguity aversion affects optimal portfolio exposures in a way that...

Università della Svizzera italiana

A note on the three-portfolio matching problem

Trojani, Fabio ; Vanini, Paolo ; Vignola, Luigi

A typical problem arising in the financial planning for private investors consists in the fact that the initial investor’s portfolio, the one determined by the consulting process of the financial institution and the universe of instruments made available to the investor have to be matched/optimized when determining the relevant portfolio choice. We call this problem the three-portfolios...

Università della Svizzera italiana

Optimal decision-making with time diversification

Vanini, Paolo ; Vignola, Luigi

In: European Finance Review, 2002, vol. 6, p. 1-30

One of the most enduring topics in financial theory is the persistence of investment risk across time. Traditional finance lacks methods for considering and hedging non-diversifiable risks. This paper is based on the general equilibrium model of Allen and Gale (1997). We extend their model in various directions: the intermediary is a firm and not a planner, financial markets are assumed to be...

Università della Svizzera italiana

Risk, robustness and knightian uncertainty in continuous-time, heterogenous agents, financial equilibria

Trojani, Fabio ; Vanini, Paolo

We analyze and compare analytically continuous-time financial equilibria where heterogeneous risk averse investors care about model misspecification through some preference for robustness and in the presence of a stochastic opportunity set. This incorporates a concern for model misspecification into equilibrium asset prices. Since no exact equilibrium computations are possible in this model...

Università della Svizzera italiana

A review of perturbative approaches for robust optimal portfolio problems

Trojani, Fabio ; Vanini, Paolo

In: Computational methods in decision-making, economics and finance, 2002, p. 109

Only a few intertemporal optimal consumption and portfolio problems in partial and general equilibrium can be solved explicitly. It is illustrated in the paper that perturbation theory is a powerful tool for deriving approximate analytical solutions for the desired optimal policies in problems where general state dynamics are admitted and a preference for robustness is present. Starting from the...

Università della Svizzera italiana

A geometric approach to multiperiod mean variance optimization of assets and liabilities

Leippold, Markus ; Trojani, Fabio ; Vanini, Paolo

We present a geometric approach to discrete time multiperiod mean variance portfolio optimization that largely simplifies the mathematical analysis and the economic interpretation of such model settings. We show that multiperiod mean variance optimal policies can be decomposed in an orthogonal set of basis strategies, each having a clear economic interpretation. This implies that the...