This paper investigates asset prices and the long run wealth of investors in an asset market populated by investors who have heterogeneous preferences over risk and ambiguity. In a dynamic setting I characterize conditions under which investors who are averse to ambiguity will have an effect on long run asset prices. If ambiguity averse investors always believe that the true distribution could be wrong in many possible directions then a necessary condition for their survival is that the market exhibit no aggregate risk, a condition not met by many asset pricing models of interest. However, unlike investors with irrational beliefs, there do exist markets in which ambiguity averse investors survive.
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I have greatly benefitted from conversations with David Easley, Karl Shell, Ani Guerdjikova, Val Lambson, Kristian Rydqvist, Liyan Yang, Josh Teitelbaum and Jayant Ganguli as well as seminar participants at Cornell University and the Midwest Economic Theory Meetings. I am grateful to the Solomon Fund for Decision Research at Cornell University for support.
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Condie, S. Living with ambiguity: prices and survival when investors have heterogeneous preferences for ambiguity. Economic Theory 36, 81–108 (2008). https://doi.org/10.1007/s00199-007-0264-1
- Asset pricing
- Recursive multiple priors
- Heterogeneous investors
- Ambiguity aversion
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