Survival with Ambiguity

Ani Guerdijkova and Emanuela Sciubba
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Ani Guerdijkova: THEMA, Université de Cergy-Pontoise

No 1216, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: We analyze a market populated by expected utility maximizers and smooth ambiguity-averse consumers. We study conditions under which ambiguity-averse consumers survive and affect prices in the limit. If ambiguity vanishes with time or if the economy exhibits no aggregate risk, ambiguity-averse consumers survive, but have no long-run impact on prices. In both scenarios, ambiguity-averse consumers are fully insured against ambiguity in equilibrium and, thus, behave as expected utility maximizers with correct beliefs. If ambiguity-averse consumers are not fully insured against ambiguity, they behave as expected utility maximizers with effectively wrong beliefs and an effective discount factor which might be higher or lower than their actual discount factor. Using this insight, we demonstrate that consumers with constant absolute ambiguity aversion vanish in expectations, whenever the economy faces aggregate risk. In contrast, consumers with constant relative (and thus, decreasing absolute) ambiguity aversion survive in expectation and with positive probability and have a non-trivial impact on prices in the limit.

Keywords: ambiguity; ambiguity-aversion; survival (search for similar items in EconPapers)
JEL-codes: D50 D81 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://eprints.bbk.ac.uk/id/eprint/5943 First version, 2012 (application/pdf)

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Journal Article: Survival with ambiguity (2015)
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