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Rational expectations and ambiguity: A comment on Abel (2002)

Author

Listed:
  • Alexander Zimper

    (Sonderforschungsbereich 504, University of Mannheim)

  • Alexander Ludwig

    (Mannheim Research Institute for the Economics of Aging, University of Mannheim)

Abstract
Abel (2002) proposes a resolution of the riskfree rate and the equity premium puzzles by considering pessimism and doubt. Pessimism is characterized by subjective probabilistic beliefs about consumption growth rates that are stochastically dominated by the objective distribution. The subjective distribution is characterized by doubt if it is a mean-preserving spread of the objective distribution. This note offers a decision theoretic foundation of Abel's ad-hoc definitions of pessimism and doubt under the assumption that individuals exhibit ambiguity attitudes in the sense of Schmeidler (1989). In particular, we show that the behavior of a representative agent, who resolves her uncertainty with respect to the true distribution of asset returns in a pessimistic way, is the equivalent to pessimism in Abel''s sense. Furthermore, a representative agent, who takes into account pessimistic as well as optimistic considerations, may result in the equivalent to doubt in Abel''s sense.

Suggested Citation

  • Alexander Zimper & Alexander Ludwig, 2006. "Rational expectations and ambiguity: A comment on Abel (2002)," Economics Bulletin, AccessEcon, vol. 4(2), pages 1-15.
    • Handle: RePEc:ebl:ecbull:eb-05d80045
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    References listed on IDEAS

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    Cited by:

    1. Zimper, Alexander, 2009. "Half empty, half full and why we can agree to disagree forever," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 283-299, August.
    2. Ludwig, Alexander & Zimper, Alexander, 2006. "Investment behavior under ambiguity: The case of pessimistic decision makers," Mathematical Social Sciences, Elsevier, vol. 52(2), pages 111-130, September.
    3. Isaac Kleshchelski & Nicolas Vincent, 2007. "Robust Equilibrium Yield Curves," Cahiers de recherche 08-02, HEC Montréal, Institut d'économie appliquée.

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    More about this item

    Keywords

    ambiguity;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services

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