Dynamically consistent α-Maxmin expected utility
Qian Lin and
Frank Riedel ()
Additional contact information
Patrick Beißner: Center for Mathematical Economics, Bielefeld University
Qian Lin: Center for Mathematical Economics, Bielefeld University
No 535, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University
The α- maxmin model is a prominent example of preferences under Knightian uncertainty as it allows to distinguish ambiguity and ambiguity attitude. These preferences are dynamically inconsistent for nontrivial versions of α. In this paper, we derive a recursive, dynamically consistent version of the α- maxmin model. In the continuous-time limit, the resulting dynamic utility function can be represented as a convex mixture between worst and best case, but now at the local, infinitesimal level. We study the properties of the utility function and provide an Arrow-Pratt approximation of the static and dynamic certainty equivalent. We derive a consumption-based capital asset pricing formula and study the implications for derivative valuation under indifference pricing.
Keywords: Dynamic consistency; [alpha]-maxmin expected utility; Knightian uncertainty; ambiguity attitude (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
https://pub.uni-bielefeld.de/download/2901123/2901196 First Version, 2016 (application/x-download)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bie:wpaper:535
Access Statistics for this paper
More papers in Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University Contact information at EDIRC.
Series data maintained by Bettina Weingarten ().