Pataracchia, B. - Tilburg University, Center for Economic Research - 2011
consumption growth process. The hidden states di¤er both for the mean and the volatility. We show that the ambiguity …-averse investor downweights high-mean states in favor of low-mean ones. However, such distortion appears much stronger in low-volatility … regimes: high volatility attenuates the distortion due to ambiguity concerns. It follows that (i) ambiguity aversion always …