Decision-makers typically rely on informative starting points that are somewhat incorrect and then attempt to make appropriate adjustments. Such reliance on informative starting points may be an optimal response of a Bayesian decision-maker who faces finite computational resources (Lieder et al...

We introduce the notion of a patience premium, which is based on the concept of ambiguity aversion and is an ambiguity premium. We identify three reasons for the existence of the patience premium: Certainty preferences: perceived confidence in the expected performance; Comparison with peers:...

This study examines risk premia in a laboratory market featuring a long-lived asset. The research is enabled by prevention of the persistent bubbles and crashes endemic to laboratory markets utilizing long-lived assets. Positive, statistically significant risk premia are reported, in support of...

In this paper I investigate financial markets with drift and volatility uncertainties. Appropriate definitions of arbitrage for super and sub-hedging strategies are presented such that the super and sub-hedging prices are reasonable. Especially the condition of arbitrage for sub-hedging strategy...

The term “equity premium puzzle” was coined in 1985 by economists Rajnish Mehra and Edward C. Prescott. The equity premium puzzle in considered one of the most significant questions in finance. A number of papers have explored the fundamental questions of why the premium exists and has not...

We develop a theoretical model to study investors' trading behavior in the presence of large shareholders' influence on a firm's equity. We show that, for a good stock, large shareholders may invest a higher proportion of their wealth in the firm than smart small investors, although they predict...

We extend the ex-ante mean-variance (SVIX) models of Martin (2017) and Martin-Wagner (2019) to a mean-variance-asymmetry (AVIX) framework for incorporating higher-moment and co-moment risk in asset pricing. AVIX is a risk-neutral measure of the left-tail asymmetries in return that corrects the...

This paper generalizes the standard mean–variance paradigm to a mean–variance–ambiguity paradigm by relaxing the assumption that probabilities are known and instead assuming that probabilities are themselves random. It extends the CAPM from risk to uncertainty by incorporating ambiguity....

While natural or technological hazards do not affect population homogeneously, self-protection is often decided and financed centrally. This paper builds a model of portfolio allocation with heterogeneity in disaster risk exposure, and with a utilitarian regulator that must decide on the amount...

We propose a novel one-sector stochastic growth model, where producitivity growth follows a Markov-switching process with two regimes, and where households have generalized recursive smooth ambiguity preferences. The adopted class of preferences permits a three-way separation of risk aversion,...