Investment, Consumption and Asset Pricing Model with Ambiguity Aversion

Abstract

In this paper, we incorporate ambiguity aversion into production-based asset-pricing model of Eberly and Wang (2009b). We derive explicitly the optimal investment, consumption, Tobin’s q, equity premium, equilibrium interest rate and growth rate of capital. We examine the impact of ambiguity aversion on the solutions of model. This paper shows that the relationship between optimal investment, consumption, Tobin’s q and the growth rate of capital and ambiguity aversion is affected by the elasticity of intertemporal substitution. The equilibrium interest rate increases with ambiguity aversion. We separate the impact of risk aversion from the risk aversion on equity premium.