This paper offers an ambiguity-based interpretation of variance premium - the difference between risk-neutral and objective expectations of market return variance - as a compounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our approach...

We study asset pricing implications of a revealing and tractable formulation of smooth ambiguity investor preferences in a continuous-time environment. Investors do not observe a hidden Markov state and instead make inferences about this state using past data. We show that ambiguity about this...