Robustness and Ambiguity Aversion in General Equilibrium

Fabio Trojani () and Paolo Vanini

Review of Finance, 2004, vol. 8, issue 2, 279-324

Abstract: We analyze the empirical predictions of ambiguity aversion in intertemporal heterogenous agents economies. We examine equilibria for two tract able wealth–homothetic settings of ambiguity aversion in continuous time. Each setting is motivated by a different robust control optimization problem. We show that ambiguity aversion affects optimal portfolios in a way that is similar to an increase in risk aversion. A distinct property of our second setting of ambiguity aversion is that this increase is state dependent, highly pronounced at moderate portfolio exposures and reduces equity-market participation. In general equilibrium, ambiguity aversion raises the equity premium and lowers interest rates. A distinct feature of our second setting of ambiguity aversion is that the equity premium part due to ambiguity aversion dominates when volatility is low.

Date: 2004
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