The Uncertainty Premium in an Ambiguous Economy
2011 ◽
Vol 01
(02)
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pp. 323-354
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The uncertainty premium is the premium that is derived from not knowing the sure outcome (risk premium) and from not knowing the precise odds of outcomes (ambiguity premium). We generalize Pratt's risk premium to uncertainty premium based on Klibanoff et al.'s (2005) smooth model of ambiguity. We show that the uncertainty premium can decrease with an increase in decision maker's risk aversion. This happens because increasing risk aversion always results in a lower ambiguity premium. The positive ambiguity premium may provide an additional explanation to the equity premium puzzle.
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1990 ◽
Vol 26
(3)
◽
pp. 387-407
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Keyword(s):
2006 ◽
Vol 09
(02)
◽
pp. 199-215
Keyword(s):
2006 ◽
Vol 2
(3)
◽
pp. 179-182
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