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Robustness and Ambiguity Aversion in General Equilibrium


  • Fabio Trojani
  • Paolo Vanini


We analyze the empirical predictions of ambiguity aversion in intertemporal heterogenous agents economies. We examine equilibria for two tractable wealth--homothetic settings of ambiguity aversion in continuous time. Each setting is motivated by a different robust control optimization problem. We show that ambiguity aversion affects optimal portfolios in a way that is similar to an increase in risk aversion. A distinct property of our second setting of ambiguity aversion is that this increase is state dependent, highly pronounced at moderate portfolio exposures and reduces equity-market participation. In general equilibrium, ambiguity aversion raises the equity premium and lowers interest rates. A distinct feature of our second setting of ambiguity aversion is that the equity premium part due to ambiguity aversion dominates when volatility is low.

Suggested Citation

  • Fabio Trojani & Paolo Vanini, 2004. "Robustness and Ambiguity Aversion in General Equilibrium," Review of Finance, Springer, vol. 8(2), pages 279-324.
  • Handle: RePEc:kap:eurfin:v:8:y:2004:i:2:p:279-324

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