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New Formulations of Ambiguous Volatility with an Application to Optimal Dynamic Contracting

Peter G. Hansen

Papers from arXiv.org

Abstract: I introduce novel preference formulations which capture aversion to ambiguity about unknown and potentially time-varying volatility. I compare these preferences with Gilboa and Schmeidler's maxmin expected utility as well as variational formulations of ambiguity aversion. The impact of ambiguity aversion is illustrated in a simple static model of portfolio choice, as well as a dynamic model of optimal contracting under repeated moral hazard. Implications for investor beliefs, optimal design of corporate securities, and asset pricing are explored.

Date: 2021-01
New Economics Papers: this item is included in nep-cta, nep-dge, nep-mic and nep-upt
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