Published paper in the Journal of Economic Theory: “Asset Pricing under Smooth Ambiguity in Continuous Time” with Jianjun Miao
Abstract
We study asset pricing implications of a revealing and tractable formulation of smooth ambiguity investor preferences in a continuous-time environment. Investors do not observe a hidden Markov state and instead make inferences about this state using past data. We show that ambiguity about this hidden state distribution alters investor decisions and equi-librium asset prices. Our continuous-time formulation allows us to apply recursive filtering and Hamilton-Jacobi-Bellman methods to solve the modified decision problem. Using such methods, we show how characterizations of portfolio allocations and local uncertainty-return trade-offs change when investors are ambiguity-averse.
Keywords— Risk, ambiguity, robustness, asset pricing, portfolio allocation, continuous time
Related: Read Research Reflection by Hansen – “Navigating Uncertainty” March 11, 2022
@article{hansen2022asset,
title={Asset Pricing Under Smooth Ambiguity in Continuous Time},
author={Hansen, Lars Peter and Miao, Jianjun},
journal={Economic Theory},
volume={74},
number={2},
pages={335--371},
year={2022},
publisher={Springer}
}