 Rational expectations and ambiguity: a comment on Abel (2002)Alexander Ludwig and Alexander Zimper No 04-66, Papers from Sonderforschungsbreich 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 meanpreserving 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. Keywords: rational expectations; ambiguity; Choquet expected utility; pessimism; optimism; equity premium puzzle; riskfree rate puzzle (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:mnh:spaper:2682 Access Statistics for this paper More papers in Papers from Sonderforschungsbreich 504 Contact information at EDIRC. |
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