Asset prices with locally constrained-entropy recursive multiple-priors utility
Control problems with recursive multiple-priors utility (RMPU) are highly non-linear so that RMPU asset prices have been studied in very simple exchange economies only. We identify a continuous-time exchange equilibrium with locally-constrained entropy RMPU (LCE-RMPU) that is tractable even in the presence of a stochastic opportunity set and incomplete markets. We find that time variation in the LCE-based ambiguity set is able to capture important features of consumption and asset markets data.
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