Abstract - Learning and Asset Prices under Ambiguous Information

We propose a new continuous-time framework to study asset prices under learning and ambiguity aversion. In a partial information Lucas economy with time-additive power utility, a discount for ambiguity arises if and only if the relative risk aversion is below one. Then, ambiguity increases equity premia and volatilities, and lowers interest rates. In our setting, ambiguity does not resolve asymptotically and, for low risk aversion, it is consistent with the qualitative predictions of the equity premium, the low interest rate, and the excess volatility puzzles.

Fabio Trojani
Universität St. Gallen
19.Apr 2005

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