Robustness and Ambiguity Aversion in General Equilibrium
Journal
Review of Finance
ISSN
1572-3097
ISSN-Digital
1875-824X
Type
journal article
Date Issued
2004
Author(s)
Trojani, Fabio
;
Vanini, Paolo
Abstract
We analyze the empirical predictions of ambiguity aversion in intertemporal heterogenous agents economies. We examine equilibria for two tractable 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.
Language
English
HSG Classification
not classified
Refereed
No
Publisher
Kluwer
Publisher place
Dordrecht, NL
Volume
8
Number
2
Start page
279
End page
324
Pages
46
Subject(s)
Division(s)
Eprints ID
12644