Ambiguity, Prudence, and Optimal Portfolio Choice: Beyond Robust Mean-Variance Analysis

Reject and Resubmit Review of Financial Studies

Abstract: This paper extends the robust mean-variance analysis of Maccheroni et al. (2013) by investigating how ambiguity prudence affects the optimal stock allocation when the investor evaluates portfolios as described by the smooth ambiguity model. Ambiguity prudence reflects an aversion to model uncertainty that intensifies as the investor perceives unfavorable events as more likely. I derive a higher-order approximation of the certainty equivalent to disentangle the contributions of preferences and beliefs to payoff valuation. Ambiguity prudence introduces nonlinearities in the investor’s valuation, leading to sizable deviations from the robust mean-variance solution, and contributes to information inertia when the investor is concerned about downside model uncertainty.

SSRN draft is here. Slides are here.

The Price of Uncertainty in the Term Structure of Equity and Treasury Yields

Abstract: I propose a consumption-based asset pricing model in which the decision maker prices U.S. Treasury zero-coupon bonds and dividend cash flows on the aggregate S&P500 index with maturities up to 30 years. The decision maker does not know the objective probability generating the data, and she evaluates a set of models that is twisted to include structured parametric alternatives. I set up a state-space with macroeconomic and aggregate financial variables to measure how the market price of (model) uncertainty contributes to the short and long-run payoff valuation. My analysis replicates prominent features of the data for both asset classes.

SSRN draft is here.

What Moves Prices? The Dynamics of Fundamentals and Returns

with Christian Schlag

We propose a dynamic model that explains a large share of both in-sample and out-of-sample variation in the annual return and growth of fundamentals on the aggregate S&P 500 index. To capture the time variation in investors' beliefs, we rely on a penalized vector autoregressive model and predictors that summarize a substantial portion of the information available in the market. We combine model-implied conditional expectations and present value identities to investigate what drives the variations in the price-to-dividend and price-to-earnings ratios. We find that time-varying expected returns account for most of the movements in the price-to-dividend ratio over the period 1980-2021, but play a smaller role in the price-to-earnings ratio. Notably, over the period 2001-2021, the expected growth of fundamentals explains a significantly larger share of the variation in both valuation ratios.

SSRN draft is here.

Assets as Lotteries

with Paul Schneider

Consumption Sharing under Heterogeneous Beliefs and Ambiguity Attitudes

Abstract: This paper studies the optimal consumption allocation when investors have heterogeneous beliefs and ambiguity attitudes towards three sources of uncertainty: the first two concern the conditional distribution of consumption, while the third one concerns the persistence of the shocks hitting the economy. I provide a mechanism to explain why, as economic conditions deteriorate, subjective beliefs polarize. If the economy has a large number of periods, then disagreement over the persistent component of consumption becomes a main driver of the changes in the distribution of wealth.

Lecturer

Master of Science

• Advanced Empirical Asset Pricing, Goethe University Frankfurt, 2021 - 2024.
• Machine Learning Methods in Asset Pricing, Goethe University Frankfurt, 2022 - 2024.

PhD

• Asset Pricing, Goethe University Frankfurt, 2024.

Teaching Assistant

Bachelor

• Microeconomics I, Bocconi University, 2015 - 2020.
• Macroeconomics I, Bocconi University, 2016 - 2016.
• Computational Microeconomics - Game Theory, Bocconi University, 2018 - 2020.

PhD

• Microeconomics I - Decision Theory, Bocconi University, 2016 - 2018.