The Price Of Risk And Ambiguity In An Intertemporal General Equilibrium Model Of Asset Prices
The authors consider a version of the intertemporal general equilibrium model of Cox et al. (1985a) with a single production process and two correlated state variables. It is assumed that only one of them, Y2, has shocks correlated with those of the economy's output rate and, simultaneously, that the representative agent is ambiguous about its stochastic process. This implies that changes in Y2 should be hedged and its uncertainty priced, with this price containing risk and ambiguity components. Ambiguity impacts asset pricing through two channels: the price of uncertainty associated with the ambiguous state variable, Y2, and the interest rate.