Robust dynamic trading with realization utility

Abstract

We incorporate model uncertainty into the intertemporal realized utility model proposed by Ingersoll and Jin (2013). We find: (1) model uncertainty erodes the investor’s value and makes him more willing to take the risk; (2) when ambiguity aversion is sufficiently high, voluntary realization of losses will not occur; (3) model uncertainty accelerates sales, thus shortening the average holding period and strengthening the disposition effect; (4) the disposition effect is weaker in the lower volatility case under model uncertainty, which is consistent with the empirical results; (5) model uncertainty alters the effect of volatility on the sale decision.