Econometrica: Jul 2002, Volume 70, Issue 4
Ambiguity, Risk, and Asset Returns in Continuous Time
Zengjing Chen, Larry EpsteinModels 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.
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