Smooth Ambiguity Aversion toward Small Risks and Continuous-Time Recursive Utility

2013 ◽  
Vol 121 (4) ◽  
pp. 775-792 ◽  
Author(s):  
Costis Skiadas
Keyword(s):  
Continuous Time ◽  
Ambiguity Aversion ◽  
Recursive Utility

scholarly journals Aversion to ambiguity and model misspecification in dynamic stochastic environments

2018 ◽  
Vol 115 (37) ◽  
pp. 9163-9168 ◽  
Author(s):  
Lars Peter Hansen ◽  
Jianjun Miao
Keyword(s):  
Continuous Time ◽  
Ambiguity Aversion ◽  
Model Misspecification ◽  
Control Problems ◽  
Bellman Equations ◽  
Subjective Uncertainty ◽  
Stochastic Environments ◽  
Intertemporal Preferences ◽  
Dynamic Stochastic ◽  
Hamilton Jacobi Bellman

Preferences that accommodate aversion to subjective uncertainty and its potential misspecification in dynamic settings are a valuable tool of analysis in many disciplines. By generalizing previous analyses, we propose a tractable approach to incorporating broadly conceived responses to uncertainty. We illustrate our approach on some stylized stochastic environments. By design, these discrete time environments have revealing continuous time limits. Drawing on these illustrations, we construct recursive representations of intertemporal preferences that allow for penalized and smooth ambiguity aversion to subjective uncertainty. These recursive representations imply continuous time limiting Hamilton–Jacobi–Bellman equations for solving control problems in the presence of uncertainty.

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