We formulate a stylized model that admits volatility ambiguity to the Lucas framework. The model specifies an economically motivated ambiguity penalty function that makes volatility ambiguity quantifiable with χ2-statistics, and allows for analytical solutions. The addition of volatility...

This paper develops an option pricing model that admits probability measure ambiguity. It formulates a piecewise risk-ambiguity-neutral probability density function and derives analytical pricing formula. Options and their underlying assets are exposed to different scopes of ambiguity that...

We formulate a tractable continuous-time rational expectations model in which the agent is ambiguity averse and would like to robustify asset return specification. Ambiguity affects the portfolio rule and asset pricing both individually and collectively with risk. Independently existing...

Information asymmetry between privately informed investors, interacting with public information transparency, significantly affects trading and learning behaviors, price formation, information revelation, and market efficiency. Private information asymmetry-induced strategic trading behaviors...

We investigate the real effects of carbon emissions trading system (ETS) on firms' production inputs, i.e. investment and labor, based on a staggered difference-in-difference (DiD) model using the quasi-natural experiment of China. The empirical results show that firms would invest more and hire...

We formulate a decision model that accommodates correlation ambiguity between the insurer’s surplus and stock return processes and study its implications for the insurer’s asset allocation rule. The ambiguity-averse insurer invests more conservatively in the stock compared to an otherwise...

Integrated assessment models (IAMs) are under criticism for their key components fall short of sufficient scientific justification and lack robustness. When using IAMs for policy assessment, a decision-maker might encounter ambiguities (Knightian uncertainties) with many facets. We develop a...