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19
Axiomatic foundations of multiplier preferences
, 2007
"... This paper axiomatizes the robust control criterion of multiplier preferences introduced by Hansen and Sargent (2001). The axiomatization relates multiplier preferences to other classes of preferences studied in decision theory. Some properties of multiplier preferences are generalized to the broade ..."
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Cited by 33 (3 self)
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This paper axiomatizes the robust control criterion of multiplier preferences introduced by Hansen and Sargent (2001). The axiomatization relates multiplier preferences to other classes of preferences studied in decision theory. Some properties of multiplier preferences are generalized to the broader class of variational preferences, recently introduced by Maccheroni, Marinacci and Rustichini (2006). The paper also establishes a link between the parameters of the multiplier criterion and the observable behavior of the agent. This link enables measurement of the parameters on the basis of observable choice data and provides a useful tool for applications. I am indebted to my advisor Eddie Dekel for his continuous guidance, support, and encouragement. I am grateful to Peter Klibanoff and Marciano Siniscalchi for many discussions which resulted in significant improvements of the paper. I would also like to thank Jeff Ely and Todd Sarver for helpful comments and suggestions. This project started after a very stimulating conversation with Tom Sargent and was further shaped by conversations with Lars Hansen. All errors are my own.
Dynamic Asset Allocation with Ambiguous Return Predictability, working paper
, 2009
"... We study an investor’s optimal consumption and portfolio choice problem when he confronts with two possibly misspecified submodels of stock returns: one with IID returns and the other with predictability. We adopt a generalized recursive ambiguity model to accommodate the investor’s aversion to mode ..."
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Cited by 22 (3 self)
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We study an investor’s optimal consumption and portfolio choice problem when he confronts with two possibly misspecified submodels of stock returns: one with IID returns and the other with predictability. We adopt a generalized recursive ambiguity model to accommodate the investor’s aversion to model uncertainty. The investor deals with specification doubts by slanting his beliefs about submodels of returns pessimistically, causing his investment strategy to be more conservative than the Bayesian strategy. This effect is large for high and low values of the predictive variable. Unlike in the Bayesian framework, the hedging demand against model uncertainty may cause the investor’s stock allocations to first decrease sharply and then increase with his prior probability of the IID model, even when the expected stock return under the IID model is lower than under the predictability model. Adopting suboptimal investment strategies by ignoring model uncertainty can lead to sizable welfare costs.
Ambiguity, Learning, and Asset Returns
, 2007
"... We develop a consumptionbased assetpricing model in which the representative agent is ambiguous about the hidden state in consumption growth. He learns about the hidden state under ambiguity by observing past consumption data. His preferences are represented by the smooth ambiguity model axiomatiz ..."
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Cited by 19 (1 self)
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We develop a consumptionbased assetpricing model in which the representative agent is ambiguous about the hidden state in consumption growth. He learns about the hidden state under ambiguity by observing past consumption data. His preferences are represented by the smooth ambiguity model axiomatized by Klibanoff et al. (2005, 2006). Unlike the standard Bayesian theory, this utility model implies that the posterior of the hidden state and the conditional distribution of the consumption process given a state cannot be reduced to a predictive distribution. By calibrating the ambiguity aversion parameter, the subjective discount factor, and the risk aversion parameter (with the latter two values between zero and one), our model can match the first moments of the equity premium and riskfree rate found in the data. In addition, our model can generate a variety of dynamic asset pricing phenomena, including the procyclical variation of pricedividend ratios, the countercyclical variation of equity premia and equity volatility, and the mean reversion and long horizon predictability of excess returns.
Intertemporal Substitution and Recursive Smooth Ambiguity Preferences
, 2010
"... In this paper, we establish an axiomatically founded generalized recursive smooth ambiguity model that allows for a separation among intertemporal substitution, risk aversion, and ambiguity aversion. We axiomatize this model using two approaches: the secondorder act approach à la Klibanoff, Marinac ..."
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Cited by 14 (3 self)
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In this paper, we establish an axiomatically founded generalized recursive smooth ambiguity model that allows for a separation among intertemporal substitution, risk aversion, and ambiguity aversion. We axiomatize this model using two approaches: the secondorder act approach à la Klibanoff, Marinacci, and Mukerji (2005) and the twostage randomization approach à la Seo (2009). We characterize risk attitude and ambiguity attitude within these two approaches. We then discuss our model’s application in asset pricing. Our recursive preference model nests some popular models in the literature as special cases.
Temporal Resolution of Uncertainty and Recursive Models of Ambiguity Aversion, working paper
, 2009
"... Models of ambiguity aversion have recently found many applications in dynamic settings. This paper shows that the modeling choices that are being made in the domain of ambiguity aversion influence the set of modeling choices available in the domain of timing attitudes, in particular the preferences ..."
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Cited by 9 (0 self)
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Models of ambiguity aversion have recently found many applications in dynamic settings. This paper shows that the modeling choices that are being made in the domain of ambiguity aversion influence the set of modeling choices available in the domain of timing attitudes, in particular the preferences for the timing of the resolution of uncertainty, as defined by the classic work of Kreps and Porteus (1978). The main result of the paper is that the only model of ambiguity aversion that exhibits indifference to timing is the maxmin expected utility of Gilboa and Schmeidler (1989). This paper also examines the structure of the timing nonindifference implied by the other commonly used models of ambiguity aversion. The interdependence of ambiguity and timing that this paper identifies is of interest both conceptually and practically—especially for economists using these models in applications. This paper is a revised and extended version of Chapters 7 and 8 of my dissertation at Northwestern University; some of the results were also reported in my job market paper. Part of this research was done while I was visiting the Economic Theory Center at Princeton University to which I’m very grateful for its support and hospitality. I would like to thank Roland Benabou, Eddie
MeanDispersion Preferences and Constant Absolute Uncertainty Aversion.
, 2011
"... We axiomatize, in an AnscombeAumann framework, the class of preferences that admit a representation of the form V (f) = (d), where is the mean utility of the act f with respect to a given probability, d is the vector of statebystate utility deviations from the mean, and (d) is a measure of (aver ..."
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Cited by 5 (1 self)
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We axiomatize, in an AnscombeAumann framework, the class of preferences that admit a representation of the form V (f) = (d), where is the mean utility of the act f with respect to a given probability, d is the vector of statebystate utility deviations from the mean, and (d) is a measure of (aversion to) dispersion that corresponds to an uncertainty premium. The key feature of these meandispersion preferences is that they exhibit constant absolute uncertainty aversion. This class includes many wellknown models of preferences from the literature on ambiguity. We show what properties of the dispersion function ( ) correspond to known models, to probabilistic sophistication, and to some new notions of uncertainty aversion.
Expected Uncertain Utility and Multiple Sources
, 2010
"... Source preference is the assertion that between two prospects yielding the same distribution of monetary rewards, decision makers may have a strict preference for one over the other. Evidence on the home bias reveals source preference strong enough to preclude investors from taking advantage of dive ..."
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Cited by 3 (3 self)
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Source preference is the assertion that between two prospects yielding the same distribution of monetary rewards, decision makers may have a strict preference for one over the other. Evidence on the home bias reveals source preference strong enough to preclude investors from taking advantage of diversification opportunities. We show that the EUU model provides a suitable framework for analyzing source preference and the home bias by providing a rich class of sources. We characterize EUU decision makers ’ risk attitudes within each source, relate these attitudes to uncertainty aversion, source preference and violations of the independence axiom.
Decision theory under uncertainty
, 2009
"... We review recent advances in the field of decision making under uncertainty or ambiguity. ..."
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Cited by 3 (0 self)
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We review recent advances in the field of decision making under uncertainty or ambiguity.
Ambiguity Aversion with Three or More Outcomes
, 2013
"... Ambiguous choice problems which involve three or more outcome values can reveal aspects of ambiguity and ambiguity aversion which cannot be displayed in the classic twooutcome Ellsberg urn problems, and hence are not always captured by models designed to accommodate them. These aspects include Alla ..."
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Cited by 2 (1 self)
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Ambiguous choice problems which involve three or more outcome values can reveal aspects of ambiguity and ambiguity aversion which cannot be displayed in the classic twooutcome Ellsberg urn problems, and hence are not always captured by models designed to accommodate them. These aspects include Allaistype preferences over purely subjective acts, attitudes toward different sources involving different amounts of ambiguity, and attitudes toward ambiguity at different outcome levels. This paper presents a few such examples, and examines the standard models ’ predictions and performance in such cases. (JEL D81) Three Decision Problems.—Consider the following decision problems. The SlightlyBent Coin Problem involves two sources of ambiguity. One source is a coin which has been slightly bent in an unknown direction. It still has welldefined probabilities, in the sense that if it were to be flipped millions of times, there is some fixed value to which the proportion of heads would converge—you just don’t know