Modeling Uncertainty as Ambiguity: a Review

Cosmin Ilut and Martin Schneider

No 29915, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We survey literature on ambiguity with an emphasis on recent applications in macroeconomics and finance. Like risk, ambiguity leads to cautious behavior and uncertainty premia in asset markets. Unlike risk, ambiguity can generate first order welfare losses. As a result, precautionary behavior and ambiguity premia obtain even when agents have linear utility and are reflected in linear approximations to model dynamics. Quantitative work exploits this insight to estimate models that jointly match the dynamics of asset prices and macro aggregates. In micro data, inertia and inaction due to ambiguity help understand patterns such as non-participation in asset markets, price rigidities and simple contracts. Learning under ambiguity generates asymmetric responses to news that help connect higher moments in micro and macro data. Survey evidence is increasingly used to provide direct evidence on ambiguity averse behavior, as well as to discipline quantitative models.

JEL-codes: D8 E2 E3 E4 G1 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-mac, nep-rmg and nep-upt
Note: AP EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www.nber.org/papers/w29915.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:29915

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w29915

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().