Ambiguity, risk and asset returns in continuous time

Zengjing Chen () and Larry Epstein ()
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Zengjing Chen: Shandong University

No 474, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

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.

Keywords: ambiguity; risk; continuous-time; asset returns; Knightian uncertainty; backward stochastic differential equation (search for similar items in EconPapers)
JEL-codes: D8 D9 G11 G12 (search for similar items in EconPapers)
Date: 2000-07
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Related works:
Journal Article: Ambiguity, Risk, and Asset Returns in Continuous Time (2002)
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