Ambiguity and Asset Markets / Larry G. Epstein, Martin Schneider.

Format:

Book

Author/Creator:

Epstein, Larry G.

Contributor:

National Bureau of Economic Research.

Schneider, Martin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16181.

NBER working paper series no. w16181

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

The Ellsberg paradox suggests that people behave differently in risky situations -- when they are given objective probabilities -- than in ambiguous situations when they are not told the odds (as is typical in financial markets). Such behavior is inconsistent with subjective expected utility theory (SEU), the standard model of choice under uncertainty in financial economics. This article reviews models of ambiguity aversion. It shows that such models -- in particular, the multiple-priors model of Gilboa and Schmeidler -- have implications for portfolio choice and asset pricing that are very different from those of SEU and that help to explain otherwise puzzling features of the data.

Notes:

Print version record

July 2010.