Facoltà di scienze economiche

Robustness and ambiguity aversion in general equilibrium

Trojani, Fabio ; Vanini, Paolo

In: Review of Finance, 2004, vol. 8, no. 2, p. 279-324

We analyze the empirical predictions arising from settings of ambiguity aversion in intertemporal heterogenous agents economies. We study equilibria for two tractable wealth-homothetic settings of ambiguity aversion in continuous time. Such settings are motivated by a different robust control optimization problem. We show that ambiguity aversion affects optimal portfolio exposures in a way that... Plus

Ajouter à la liste personnelle
    Summary
    We analyze the empirical predictions arising from settings of ambiguity aversion in intertemporal heterogenous agents economies. We study equilibria for two tractable wealth-homothetic settings of ambiguity aversion in continuous time. Such settings are motivated by a different robust control optimization problem. We show that ambiguity aversion affects optimal portfolio exposures in a way that is similar to an increase in risk aversion. A distinct property of the second of our settings of ambiguity aversion is that such increase is state-dependent and highly pronounced at moderate portfolio exposures. This feature causes quite prudent levels of equity market participation over a nontrivial set of states of the economy. In general equilibrium, ambiguity aversion tends to induce a higher equilibrium equity premium and lower interest rates. A distinct feature of the second of our settings of ambiguity aversion is that the equity premium part due to ambiguity aversion dominates when the exogenous random factors in the economy have low volatility. Thus, such setting can account for some distinct empirical predictions - like a limited equity market participation and ambiguity equity premia that dominate equity premia for small equity volatilities - which are unavailable under the first of our settings of ambiguity aversion.