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Rational Expectations and Ambiguity: A Comment on Abel (2002)

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  • Ludwig, Alexander

    () (Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504)

  • Zimper, Alexander

    () (Sonderforschungsbereich 504)

Abstract

Abel (2002) proposes a resolution of the riskfree rate and the equity premium puzzles} by considering pessimism and doubt. Pessimism is characterized by subjective probabilistic beliefs about asset returns that are stochastically dominated by the objective distribution of these returns. The subjective distribution is characterized by doubt if it is a mean-preserving spread of the objective distribution. This note offers a decision theoretic foundation of Abel's ad-hoc definitions of pessimism and doubt under the assumption that individuals exhibit ambiguity attitudes in the sense of Schmeidler (1989). In particular, we show that the behavior of a representative agent, who resolves her uncertainty with respect to the true distribution of asset returns in a pessimistic way, is the equivalent to pessimism in Abel's sense. Furthermore, a representative agent, who takes into account pessimistic as well as optimistic considerations, may result in the equivalent to doubt in Abel's sense.

Suggested Citation

  • Ludwig, Alexander & Zimper, Alexander, 2004. "Rational Expectations and Ambiguity: A Comment on Abel (2002)," Sonderforschungsbereich 504 Publications 04-66, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  • Handle: RePEc:xrs:sfbmaa:04-66
    Note: We thank Juergen Eichberger, Itzhak Gilboa, and David Schmeidler for helpful comments and suggestions. Financial support from Deutsche Forschungsgemeinschaft, Sonderforschungsbereich 504, is gratefully acknowledged.
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    References listed on IDEAS

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    Cited by:

    1. Ludwig, Alexander & Zimper, Alexander, 2006. "Investment behavior under ambiguity: The case of pessimistic decision makers," Mathematical Social Sciences, Elsevier, vol. 52(2), pages 111-130, September.
    2. Isaac Kleshchelski & Nicolas Vincent, 2007. "Robust Equilibrium Yield Curves," Cahiers de recherche 08-02, HEC Montréal, Institut d'économie appliquée.
    3. Tigran Melkonyan & Mark Pingle, 2008. "Ambiguity, Pessimism, and Religious Choice," Working Papers 08-002, University of Nevada, Reno, Department of Economics;University of Nevada, Reno , Department of Resource Economics.

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services

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