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The identification of attitudes towards ambiguity and risk from asset demand

Author

Listed:
  • Polemarchakis, Herakles

    (Department of Economics, University of Warwick and LabEx MME-DII, University of Paris 2)

  • Selden, Larry

    (Columbia Business School, Columbia University and University of Pennsylvania)

  • Song, Xinxi

    (International School of Economics and Management, Capital University of Economics and Business)

Abstract

Individuals behave differently when they know the objective probability of events and when they do not. The smooth ambiguity model accommodates both ambiguity (uncertainty) and risk. For an incomplete, competitive asset market, we develop a revealed preference test for asset demand to be consistent with the maximization of smooth ambiguity preferences ; and we show that ambiguity preferences constructed from finite observations converge to underlying ambiguity preferences as observations become dense. Subsequently, we give sufficient conditions for the asset demand generated by smooth ambiguity preferences to identify the ambiguity and risk indices as well as the ambiguity probability measure. We do not require ambiguity beliefs to be observable : in a generalized specification, they may not even be defined. An ambiguity free asset plays an important role for identification.

Suggested Citation

  • Polemarchakis, Herakles & Selden, Larry & Song, Xinxi, 2017. "The identification of attitudes towards ambiguity and risk from asset demand," CRETA Online Discussion Paper Series 28, Centre for Research in Economic Theory and its Applications CRETA.
    • Handle: RePEc:wrk:wcreta:28
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/centres/creta/papers/manage/28_-_creta_polemarchakis.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    risk ; uncertainty ; identification JEL classification numbers: D11 ; D80 ; D81;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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