Ambiguity and optimal portfolio choice with Value-at-Risk constraint

- Optimal portfolio choice with a Value-at-Risk (VaR) constraint and ambiguity aversion is proposed.
- In the presence of ambiguity, the aggressive investment arising from the VaR constraint is mitigated.
- Dynamic portfolio decision is more dependent on risk aversion than ambiguity aversion.

Integrating a Value-at-Risk constraint on a fund manager's wealth and ambiguity, we present a model of optimal portfolio choice for a fund manager who allocates her wealth between risky and riskless assets. When a fund manager controls asset composition, her reactions differ with respect to an increase in only risk aversion and only ambiguity aversion. When the sum of coefficients of risk aversion and ambiguity aversion is fixed, the effect of risk aversion on risky investment dominates the effect of ambiguity aversion in that stock holdings are dramatically smaller in the absence of ambiguity aversion than in its presence.