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Portfolio Choices and Asset Prices: The Comparative Statics of Ambiguity Aversion

  • Gollier, Christian

We investigate the comparative statics of "more ambiguity aversion" as defined by Klibanoff, Marinacci and Mukerji (2005) in the context of the static two-asset portfolio problem. It is not true in general that more ambiguity aversion reduces the demand for the uncertain asset. We exhibit some sufficient conditions to guarantee that, ceteris paribus, an increase in ambiguity aversion reduces the demand for the ambiguous asset, and raises the equity premium. For example, this is the case when the set of plausible distributions of returns can be ranked according to the monotone likelihood ratio order. We also show how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 357.

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Date of creation: Jul 2009
Date of revision: 2011
Handle: RePEc:ide:wpaper:4812
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  2. Nengjiu Ju & Jianjun Miao, . "Ambiguity, Learning, and Asset Returns," Boston University - Department of Economics - Working Papers Series wp2009-014, Boston University - Department of Economics.
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