New formulations of ambiguous volatility with an application to optimal dynamic contracting

@article{Hansen2021NewFO,
  title={New formulations of ambiguous volatility with an application to optimal dynamic contracting},
  author={Peter G Hansen},
  journal={Journal of Economic Theory},
  year={2021},
  pages={105205}
}
Abstract I introduce novel preference formulations which capture aversion to ambiguity about unknown and potentially time-varying volatility. I compare these preferences with Gilboa and Schmeidler's maxmin expected utility as well as variational formulations of ambiguity aversion. The impact of ambiguity aversion is illustrated in a simple static model of portfolio choice, as well as a dynamic model of optimal contracting under repeated moral hazard. Implications for investor beliefs, optimal… Expand
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