Rational Expectations and Ambiguity: A Comment on Abel (2002)
AbstractAbel (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 asset returns that are stochastically dominated by the objective distribution of these returns. 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 InfoPaper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 04-66.
Length: 14 pages
Date of creation: 22 Dec 2004
Date of revision:
Note: We thank Juergen Eichberger, Itzhak Gilboa, and David Schmeidler for helpful comments and suggestions. Financial support from Deutsche Forschungsgemeinschaft, Sonderforschungsbereich 504, is gratefully acknowledged.
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Other versions of this item:
- Alexander Zimper & Alexander Ludwig, 2006. "Rational expectations and ambiguity: A comment on Abel (2002)," Economics Bulletin, AccessEcon, vol. 4(2), pages 1-15.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G2 - Financial Economics - - Financial Institutions and Services
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