The dual theory of the smooth ambiguity model

Hideki Iwaki () and Yusuke Osaki ()

Economic Theory, 2014, vol. 56, issue 2, 275-289

Abstract: This paper studies the “dual” theory of the smooth ambiguity model introduced by Klibanoff et al. (Econometrica 73:1849–1892, 2005 ). Unlike the original model, we characterize attitudes toward ambiguity captured by second-order probabilities. First, we give a set of axioms to derive a dual representation of the smooth ambiguity model. Second, we present a characterization of ambiguity aversion. Last, as an application of our dual model to a portfolio problem, we conduct comparative static predictions which give sufficient conditions to guarantee that an increase in smooth ambiguity aversion decreases the optimal portfolio. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Ambiguity; Ambiguity aversion; Comparative statics; Smooth ambiguity model; D800; D810 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s00199-013-0779-6

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