Ambiguity, risk and asset returns in continuous time
AbstractExisting models in stochastic continuous-time settings assume that beliefs are represented by a probability measure. As illustrated by the Ellsberg Paradox, this feature rules out a priori any concern with ambiguity. This paper formulates a continuous-time intertemporal version of multiple-priors utility, where aversion to ambiguity is admissible. When applied to a representative agent asset market setting, the model delivers restrictions on excess returns that admit interpretations reflecting a premium for risk and a seperate premium for ambiguity.
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Bibliographic InfoPaper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 474.
Length: 47 pages
Date of creation: Jul 2000
Date of revision:
Contact details of provider:
Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.
ambiguity; risk; continuous-time; asset returns; Knightian uncertainty; backward stochastic differential equation;
Other versions of this item:
- Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D9 - Microeconomics - - Intertemporal Choice and Growth
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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