Robust consumption and portfolio rules with time-varying model confidence

- We investigate the robust optimal consumption and investment behaviors for an Epstein-Zin type investor who is concerned about model misspecification.
- A semi-explicit solution for the generalized problem of Hansen and Sargent (2001) is presented.
- The optimal consumption can monotonically increase or decrease in the investor's confidence level on a reference model, depending on the level of elasticity of intertemporal substitution in consumption (EIS).
- The optimal asset demands could vary across a range of EIS even under a constant investment opportunity.
- The investor makes more robust (aggressive) decision when she meets positive (negative) news.

This paper investigates robust optimal consumption and portfolio rules for an Epstein-Zin type investor who is concerned about model misspecification. We propose a semi-explicit solution for the generalized problem of [Hansen, L., Sargent, T., 2001. Robust control and model uncertainty. The American Economic Review 91 (2), 60-66.]. Numerical results show that the optimal behaviors change dramatically according to the investor's confidence level on the estimated model and that the elasticity of intertemporal substitution in consumption can affect investment ratio. In addition, we show how the investor decides her optimal behaviors for the worst-case scenario.