Daniele Pennesi

“Asset prices in an ambiguous economy”

abstract

We price assets with ambiguous returns in a Lucas’ tree economy under general ambiguity sensitive inter-temporal utility. We provide intuitive conditions to guarantee existence and to characterize equilibria. Although we relax ambiguity aversion,portfolio inertia and excess volatility may obtain at the equilibrium, extending the results of Epstein and Wang (’94). Lastly, we prove that ambiguity enriches the standard pricing formula by an additional stochastic discount factor and we study the effect of risk and ambiguity on excess returns.