New Formulations of Ambiguous Volatility with an Application to Optimal Dynamic Contracting
Theoretical Economics
2021-09-21 v1 Mathematical Finance
Abstract
I introduce novel preference formulations which capture aversion to ambiguity about unknown and potentially time-varying volatility. I compare these preferences with Gilboa and Schmeidler's maxmin expected utility as well as variational formulations of ambiguity aversion. The impact of ambiguity aversion is illustrated in a simple static model of portfolio choice, as well as a dynamic model of optimal contracting under repeated moral hazard. Implications for investor beliefs, optimal design of corporate securities, and asset pricing are explored.
Keywords
Cite
@article{arxiv.2101.12306,
title = {New Formulations of Ambiguous Volatility with an Application to Optimal Dynamic Contracting},
author = {Peter G. Hansen},
journal= {arXiv preprint arXiv:2101.12306},
year = {2021}
}
Comments
38 pages, 7 figures