Smooth Ambiguity Aversion and the Continuous-Time Limit

71 Pages Posted: 11 Oct 2010 Last revised: 16 Mar 2012

See all articles by Ronald Gindrat

Ronald Gindrat

University of Geneva; Ecole Polytechnique Fédérale de Lausanne

Jean Lefoll

University of Geneva

Date Written: November 13, 2011

Abstract

Skiadas (2009) shows that Klibanoff, Marinacci, Mukerji (2005, 2009) and related smooth representations of ambiguity averse preferences are not able to describe an ambiguity averse behavior when the underlying uncertainty is of the Brownian or Poissonian type. We propose a preferences representation that admits a smooth ambiguity averse behavior in such cases. In a jump-diffusion uncertainty environment, this representation is shown to embed many explicit utility backward stochastic differential equations studied in the literature and many new explicit forms.

Keywords: Ambiguity, continuous-time, recursive utility

JEL Classification: D81

Suggested Citation

Gindrat, Ronald and Lefoll, Jean, Smooth Ambiguity Aversion and the Continuous-Time Limit (November 13, 2011). Available at SSRN: https://ssrn.com/abstract=1690240 or http://dx.doi.org/10.2139/ssrn.1690240

Ronald Gindrat (Contact Author)

University of Geneva ( email )

40, Bd du Pont-d'Arve
Genève, CH - 1205
Switzerland

Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Jean Lefoll

University of Geneva ( email )

40, Boulevard du Pont-d'Arve
Genève, CH - 1205
Switzerland

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