Robust Consumption and Portfolio Choice forTime-varying Investment Opportunities

This paper examines a continuous-time intertemporal consumption and portfoliochoice problem for an investor with Duffie and Epstein (1992a)’s recursive preferenceswho worries about model misspecification (model uncertainty) and wants toseek robust decision rules. The expected excess return of a risky asset follows amean-reverting process. I find that whether the concern about model uncertaintydecreases the total demand for equities largely depends on risk aversion and theattitude toward intertemporal substitution. When the elasticity of intertemporalsubstitution (EIS) is about one and risk aversion is moderate, the concern aboutmodel uncertainty increases the proportion of wealth invested in equities....