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


Ludwig, Alexander ; Zimper, Alexander


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URL: http://ub-madoc.bib.uni-mannheim.de/2682
URN: urn:nbn:de:bsz:180-madoc-26828
Document Type: Working paper
Year of publication: 2004
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: D81 G20 ,
Subject headings (SWD): Pessimismus , Optimismus , Ambiguität
Keywords (English): rational expectations , ambiguity , Choquet expected utility , pessimism , optimism , equity premium puzzle , riskfree rate puzzle
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 asset returns that are stochastically dominated by the objective distribution of these returns. The subjective distribution is characterized by doubt if it is a meanpreserving 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.
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Ludwig, Alexander ; Zimper, Alexander (2004) Rational expectations and ambiguity : a comment on Abel (2002). Open Access [Working paper]
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