Details
| Original language | English |
|---|---|
| Pages (from-to) | 53-89 |
| Number of pages | 37 |
| Journal | Economic theory |
| Volume | 67 |
| Issue number | 1 |
| Early online date | 5 Jan 2018 |
| Publication status | Published - 8 Feb 2019 |
| Externally published | Yes |
Abstract
We study the market implications of ambiguity sensitive preferences using the α-maxmin expected utility (α-MEU) model. In the standard Ellsberg framework, we prove that α-MEU preferences are equivalent to either maxmin, maxmax or subjective expected utility (SEU). We show how ambiguity aversion impacts equilibrium asset prices, and revisit the laboratory experimental findings in Bossaerts et al. (Rev Financ Stud 23:1325–1359, 2010). Only when there are three or more ambiguous states, α-MEU, maxmin, maxmax and SEU models induce different portfolio choices. We suggest criteria to discriminate among these models in laboratory experiments and show that ambiguity seeking agents may prevent the existence of market equilibrium. Our results indicate that ambiguity matters for portfolio choice and does not wash out in equilibrium.
Keywords
- Ambiguity aversion, Ellsberg framework, Market equilibrium, Portfolio choice, α-maxmin expected utility model
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Economic theory, Vol. 67, No. 1, 08.02.2019, p. 53-89.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Ambiguity sensitive preferences in Ellsberg frameworks
AU - Ravanelli, Claudia
AU - Svindland, G.
N1 - Publisher Copyright: © 2018, Springer-Verlag GmbH Germany, part of Springer Nature.
PY - 2019/2/8
Y1 - 2019/2/8
N2 - We study the market implications of ambiguity sensitive preferences using the α-maxmin expected utility (α-MEU) model. In the standard Ellsberg framework, we prove that α-MEU preferences are equivalent to either maxmin, maxmax or subjective expected utility (SEU). We show how ambiguity aversion impacts equilibrium asset prices, and revisit the laboratory experimental findings in Bossaerts et al. (Rev Financ Stud 23:1325–1359, 2010). Only when there are three or more ambiguous states, α-MEU, maxmin, maxmax and SEU models induce different portfolio choices. We suggest criteria to discriminate among these models in laboratory experiments and show that ambiguity seeking agents may prevent the existence of market equilibrium. Our results indicate that ambiguity matters for portfolio choice and does not wash out in equilibrium.
AB - We study the market implications of ambiguity sensitive preferences using the α-maxmin expected utility (α-MEU) model. In the standard Ellsberg framework, we prove that α-MEU preferences are equivalent to either maxmin, maxmax or subjective expected utility (SEU). We show how ambiguity aversion impacts equilibrium asset prices, and revisit the laboratory experimental findings in Bossaerts et al. (Rev Financ Stud 23:1325–1359, 2010). Only when there are three or more ambiguous states, α-MEU, maxmin, maxmax and SEU models induce different portfolio choices. We suggest criteria to discriminate among these models in laboratory experiments and show that ambiguity seeking agents may prevent the existence of market equilibrium. Our results indicate that ambiguity matters for portfolio choice and does not wash out in equilibrium.
KW - Ambiguity aversion
KW - Ellsberg framework
KW - Market equilibrium
KW - Portfolio choice
KW - α-maxmin expected utility model
UR - http://www.scopus.com/inward/record.url?scp=85040041320&partnerID=8YFLogxK
U2 - 10.1007/s00199-017-1095-3
DO - 10.1007/s00199-017-1095-3
M3 - Article
VL - 67
SP - 53
EP - 89
JO - Economic theory
JF - Economic theory
SN - 0938-2259
IS - 1
ER -