Learning and Asset Prices under Ambiguous Information?

Learning and Asset Prices under Ambiguous Information We propose a new continuous-time framework for studying asset prices under learning and ambiguity aversion. In a Lucas economy with time-additive power utility, a discount for ambiguity arises for a relative risk aversion below one or, equivalently, an intertemporal elasticity of substitution above one. The joint presence of learning and ambiguity enforces large equity premia and model predictions consistent with well-known asset pricing puzzles. For realistic amounts of ambiguity, absence of either learning or ambiguity aversion implies low volatilities or low equity premia