Portfolio and Consumption Decisions under Ambiguity for Regime Switching Mean Returns

This paper examines a continuous-time intertemporal consumption and portfolio choice problem foran ambiguity-averse investor with multiple priors when the expected return of a risky asset isunobservable and follows a hidden Markov chain. The investor’s beliefs over investmentopportunities are represented by a set of priors over the process governing the dynamics of theconditional estimates of the unobservable state. The investor is assumed to have Chen andEpstein’s (2002) recursive multiple priors utility preferences. Using the Malliavin calculus technique, we characterize the optimal consumption and portfolio rules explicitly in terms of the Malliavin derivatives and stochastic integrals....