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Asset Prices in an Ambiguous Economy

Listed author(s):
  • Daniele Pennesi

This paper studies the pricing implications of the sole ambiguity aversion, in a Lucas’ tree economy where asset returns are ambiguous. Abstracting from a specific functional form, we disentangle the model-specific effect from the effect of ambiguity aversion. In addition, we allow the investor to change her tastes across time in a dynamically consistent way. Two phenomena are consistent with ambiguity aversion: portfolio inertia and price indeterminacy. We provide intuitive conditions to guarantee the existence and to characterize equilibria, showing that the relevant information to price asset is contained in a set of priors who is identifiable in any model used in applications. Lastly, we prove that ambiguity enriches the standard pricing formula by an additional stochastic discount factor and we calculate its explicit formfor various models.

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File URL: http://www.carloalberto.org/assets/working-papers/no.315.pdf
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Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 315.

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Length: 35 pages
Date of creation: 2013
Handle: RePEc:cca:wpaper:315
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