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Ambiguity, risk and asset returns in continuous time

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Author Info
Zengjing Chen () (Shandong University)
Larry G. Epstein () (University of Rochester)

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Abstract

Existing models in stochastic continuous-time settings assume that beliefs are represented by a probability measure. As illustrated by the Ellsberg Paradox, this feature rules out a priori any concern with ambiguity. This paper formulates a continuous-time intertemporal version of multiple-priors utility, where aversion to ambiguity is admissible. When applied to a representative agent asset market setting, the model delivers restrictions on excess returns that admit interpretations reflecting a premium for risk and a seperate premium for ambiguity.

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_474.pdf
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Publisher Info
Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 474.

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Length: 47 pages
Date of creation: Jul 2000
Date of revision:
Handle: RePEc:roc:rocher:474

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Postal: UNIVERSITY OF ROCHESTER, CENTER FOR ECONOMIC RESEARCH, DEPARTMENT OF ECONOMICS, HARKNESS 231 ROCHESTER NEW YORK 14627 U.S.A.

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Related research
Keywords: ambiguity; risk; continuous-time; asset returns; Knightian uncertainty; backward stochastic differential equation;

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
D9 - Microeconomics - - Intertemporal Choice and Growth
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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