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Learning and Asset Prices under Ambiguous Information

Author

Listed:
  • Fabio Trojani
  • Markus Leippold
  • Paolo Vanini
Abstract
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 elasticity of intertemporal substitution (EIS) is above one. Then, ambiguity increases equity premia and volatilities, and lowers interest rates. Very low EIS estimates are consistent with EIS parameters above one, because of a downward bias in Euler-equations-based least squares regressions. In our setting, ambiguity does not resolve asymptotically and, for high EIS, it is consistent with the equity premium, the low interest rate, and the excess volatility puzzles.

Suggested Citation

  • Fabio Trojani & Markus Leippold & Paolo Vanini, 2005. "Learning and Asset Prices under Ambiguous Information," University of St. Gallen Department of Economics working paper series 2005 2005-03, Department of Economics, University of St. Gallen.
    • Handle: RePEc:usg:dp2005:2005-03
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    References listed on IDEAS

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    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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