This paper assesses the quantitative impact of ambiguity on the historically observed equity premium. We consider a Lucas-tree pure—exchange economy with a single agent where we introduce two key non-standard assumptions. First, the agent’s beliefs about the dividend/consumption process is ambiguous, i.e., she is uncertain about the exact probability distribution governing the realization of future dividends and consumption. Second, the agent’s preferences are sensitive to this ambiguity, a p...Expand abstract
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Ambiguity and the historical equity premium.
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