Learning and Asset Prices under Ambiguous Information

Fabio Trojani (), Markus Leippold () and Paolo Vanini

University of St. Gallen Department of Economics working paper series 2005 from Department of Economics, University of St. Gallen

Abstract: We propose a new continuous time framework to study asset prices under learning and ambiguity aversion. In a partial information Lucas economy with time additive power utility, a discount for ambiguity arises if and only if the elasticity of intertemporal substitution (EIS) is above one. Then, ambiguity increases equity premia and volatilities, and lowers interest rates. Very low EIS estimates are consistent with EIS parameters above one, because of a downward bias in Euler-equations-based least squares regressions. In our setting, ambiguity does not resolve asymptotically and, for high EIS, it is consistent with the equity premium, the low interest rate, and the excess volatility puzzles.

JEL-codes: C60 C61 G11 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2005-01
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Learning and Asset Prices Under Ambiguous Information (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:dp2005:2005-03

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