Market sentiment drives fluctuations in financial markets, but it is measured with empirical proxies lacking strong theoretical foundations. In a generalization of the Consumption CAPM where the representative agent has a prospect theory probability weighting function, we derive a formula for...

We study a representative agent that separates beliefs, ambiguity, and ambiguity attitude and nests benchmark models of expected utility preferences and ambiguity aversion. Within that framework, matching four market moments (the risk-free rate, equity premium, variance risk premium, and...