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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...

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...