Asset Prices With Locally-Constrained-Entropy Recursive Multiple Priors Utility

36 Pages Posted: 7 Jul 2007

See all articles by Alessandro Sbuelz

Alessandro Sbuelz

Catholic University of Milan - Department of Mathematics, Quantitative Finance, and Econometrics; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Fabio Trojani

Swiss Finance Institute; University of Geneva

Date Written: May 2007

Abstract

Control problems with Recursive Multiple-Priors Utility (RMPU) are higly non-linear so that RMPU asset prices have been studied in very simple exchange economies only. We identify a continuous-time exchange equilibrium with Locally-Constrained-Entropy RMPU (LCE-RMPU) that is tractable even in the presence of a stochastic opportunity set and incomplete markets. We find that time variation in the LCE-based ambiguity set is able to capture important features of consumption and asset markets data.

Keywords: Asset Pricing, General Equilibrium, Model Misspecification, Recursive Multiple Priors Utility, Locally Constrained Entropy

JEL Classification: G11, G12

Suggested Citation

Sbuelz, Alessandro and Trojani, Fabio, Asset Prices With Locally-Constrained-Entropy Recursive Multiple Priors Utility (May 2007). Available at SSRN: https://ssrn.com/abstract=997425 or http://dx.doi.org/10.2139/ssrn.997425

Alessandro Sbuelz (Contact Author)

Catholic University of Milan - Department of Mathematics, Quantitative Finance, and Econometrics ( email )

largo A. Gemelli 1
I-20123 Milan
Italy
+39 02 7234 2345 (Phone)
+39 02 7234 2671 (Fax)

HOME PAGE: http://ppd.unicatt.it/docenti/alessandro_sbuelz

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva, Geneva
Switzerland

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