Econometrica: Jul, 2002, Volume 70, Issue 4

Ambiguity, Risk, and Asset Returns in Continuous Time

https://doi.org/10.1111/1468-0262.00337
p. 1403-1443

Zengjing Chen, Larry Epstein

Models 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.