Asset Prices With Locally-Constrained-Entropy Recursive Multiple Priors Utility
36 Pages Posted: 7 Jul 2007
Date Written: May 2007
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: Suggested Citation