Intertemporal Asset Pricing Under Knightian Uncertainty

The R. E. Lucas (1978) general equilibrium model of asset prices is extended to admit beliefs that are represented by a (nonsingleton) set of probability measures. A primary motivation is evidence, such as the Ellsberg paradox, that people are averse to vague or imprecise probabilities. Intertemporal utility functions embodying such aversion are formulated and then, in the context of a Lucas-style economy, the existence and characterization of equilibria are addressed. A noteworthy feature is that (under specified conditions) equilibria are indeterminate. Therefore, 'animal spirits' may play a role and sizable price volatility may result. Copyright 1994 by The Econometric Society.

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