Ambiguity, Risk, and Asset Returns in Continuous Time

Zengjing Chen () and Larry Epstein
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Zengjing Chen: Shandong University, Jinan, China

Econometrica, 2002, vol. 70, issue 4, 1403-1443

Abstract: Models of utility in stochastic continuous-time settings typically assume that beliefs are represented by a probability measure, hence ruling 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. In a representative agent asset market setting, the model delivers restrictions on excess returns that admit interpretations reflecting a premium for risk and a separate premium for ambiguity. Copyright The Econometric Society 2002.

Date: 2002
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