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The identification of attitudes towards ambiguity and risk from asset demand
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Polemarchakis, H. M., Selden, Larry and Song, Xinxi (2017) The identification of attitudes towards ambiguity and risk from asset demand. Discussion Paper. Coventry: University of Warwick. Department of Economics. CRETA Discussion Paper Series (28). (Unpublished)
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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
Individuals behave differently when they know the objective probability of events and when they do not. The smooth ambiguity model accommodates both ambiguity (uncertainty) and risk. For an incomplete, competitive asset market, we develop a revealed preference test for asset demand to be consistent with the maximization of smooth ambiguity preferences; and we show that ambiguity preferences constructed from finite observations converge to underlying ambiguity preferences as observations become dense. Subsequently, we give sufficient conditions for the asset demand generated by smooth ambiguity preferences to identify the ambiguity and risk indices as well as the ambiguity probability measure. We do not require ambiguity beliefs to be observable: in a generalized specification, they may not even be defined. An ambiguity free asset plays an important role for identification.
Item Type: | Working or Discussion Paper (Discussion Paper) | ||||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HF Commerce |
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Divisions: | Faculty of Social Sciences > Economics | ||||||
Library of Congress Subject Headings (LCSH): | Markets -- Mathematical models, Risk, Uncertainty | ||||||
Series Name: | CRETA Discussion Paper Series | ||||||
Publisher: | University of Warwick. Department of Economics | ||||||
Place of Publication: | Coventry | ||||||
Official Date: | March 2017 | ||||||
Dates: |
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Number: | 28 | ||||||
Number of Pages: | 38 | ||||||
Institution: | University of Warwick | ||||||
Status: | Not Peer Reviewed | ||||||
Publication Status: | Unpublished | ||||||
Access rights to Published version: | Open Access (Creative Commons) | ||||||
Date of first compliant deposit: | 5 January 2017 | ||||||
Date of first compliant Open Access: | 6 January 2017 | ||||||
Funder: | British Council. UK-China Scholarships for Excellence, Shou du jing ji mao yi da xue [Capital University of Economics and Business] | ||||||
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