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Rational expectations and ambiguity: A comment on Abel (2002)

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  • Alexander Zimper

    ()
    (Sonderforschungsbereich 504, University of Mannheim)

  • Alexander Ludwig

    ()
    (Mannheim Research Institute for the Economics of Aging, University of Mannheim)

Abstract

Abel (2002) proposes a resolution of the riskfree rate and the equity premium puzzles by considering pessimism and doubt. Pessimism is characterized by subjective probabilistic beliefs about consumption growth rates that are stochastically dominated by the objective distribution. The subjective distribution is characterized by doubt if it is a mean-preserving spread of the objective distribution. This note offers a decision theoretic foundation of Abel's ad-hoc definitions of pessimism and doubt under the assumption that individuals exhibit ambiguity attitudes in the sense of Schmeidler (1989). In particular, we show that the behavior of a representative agent, who resolves her uncertainty with respect to the true distribution of asset returns in a pessimistic way, is the equivalent to pessimism in Abel''s sense. Furthermore, a representative agent, who takes into account pessimistic as well as optimistic considerations, may result in the equivalent to doubt in Abel''s sense.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 4 (2006)
Issue (Month): 2 ()
Pages: 1-15

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Handle: RePEc:ebl:ecbull:eb-05d80045

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Keywords: ambiguity;

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  1. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 3(4), pages 323-343, December.
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  8. Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, Econometric Society, vol. 70(4), pages 1403-1443, July.
  9. Wakker, Peter P, 2001. "Testing and Characterizing Properties of Nonadditive Measures through Violations of the Sure-Thing Principle," Econometrica, Econometric Society, Econometric Society, vol. 69(4), pages 1039-59, July.
  10. Lars Hansen & Thomas Sargent & Thomas Tallarini, . "Robust Permanent Income and Pricing," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1997-51, Carnegie Mellon University, Tepper School of Business.
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  13. Ghirardato, Paolo & Klibanoff, Peter & Marinacci, Massimo, 1998. "Additivity with multiple priors," Journal of Mathematical Economics, Elsevier, vol. 30(4), pages 405-420, November.
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Cited by:
  1. Isaac Kleshchelski & Nicolas Vincent, 2009. "Robust Equilibrium Yield Curves," Cahiers de recherche, CIRPEE 0907, CIRPEE.
  2. Ludwig, Alexander & Zimper, Alexander, 2004. "Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers," Sonderforschungsbereich 504 Publications, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim 04-31, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  3. Tigran Melkonyan & Mark Pingle, 2008. "Ambiguity, Pessimism, and Religious Choice," Working Papers, University of Nevada, Reno, Department of Economics;University of Nevada, Reno , Department of Resource Economics 08-002, University of Nevada, Reno, Department of Economics;University of Nevada, Reno , Department of Resource Economics.

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