Asset Pricing Implications of Ambiguity-sensitive Decision Models

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Expected Utility is the predominant decision model in finance and economics, especially in asset pricing theory. It assumes that investors abstract away from ambiguity, i.e. uncertainty about the true probability distribution of future cash flows. However, in experiments subjects show aversion against ambiguity. Moreover, recent empirical evidence points to large ambiguity premia in stock returns. Several ambiguity-sensitive extensions of the expected utility decision model have been proposed and analyzed in the context of general equilibrium asset pricing models. The aim of the proposed project is to contrast the qualitative predictions of the most prominent and most promising ambiguity-sensitive decision models for stock and bond returns in a unified setting. The results will deepen the understanding of the mechanisms by which the models generate ambiguity premia and enable the derivation of testable hypothesis which can ultimately be used to assess the models' capabilities to answer some fundamental questions in the field of asset pricing.