Smooth Ambiguity Aversion and the Continuous-Time Limit

Abstract

Skiadas (2009) shows that Klibanoff, Marinacci, Mukerji (2005, 2009) and related smooth representations of ambiguity averse preferences are not able to describe an ambiguity averse behavior when the underlying uncertainty is of the Brownian or Poissonian type. We propose a preferences representation that admits a smooth ambiguity averse behavior in such cases. In a jump-diffusion uncertainty environment, this representation is shown to embed many explicit utility backward stochastic differential equations studied in the literature and many new explicit forms.

Keywords: Ambiguity, continuous-time, recursive utility

JEL Classification: D81