[We formulate a model of utility for a continuous-time framework that captures aversion to ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are presented. First, we derive arbitrage-free pricing rules based on hedging arguments. Because ambiguous volatility implies market incompleteness, hedging arguments determine prices only up to intervals. In order to obtain sharper predictions, we apply the model of utility to a representative agent endowment economy and study equilibrium asset returns. A version of the consumption capital asset pricing model is derived, and the effects of ambiguous volatility are described.]

[Asset pricing theory is presented with representative-agent utility given by a stochastic differential formulation of recursive utility. Asset returns are characterized from general first-order conditions of the Hamilton-Bellman-Jacobi equation for optimal control. Homothetic representative-agent recursive utility functions are shown to imply that excess expected rates of return on securities are given by a linear combination of the continuous-time market-portfolio-based capital asset pricing model (CAPM) and the consumption-based CAPM. The Cox, Ingersoll, and Ross characterization of the term structure is examined with a recursive generalization, showing the response of the term structure to variations in risk aversion. Also, a new multicommodity factor-return model, as well as an extension of the "usual" discounted expected value formula for asset prices, is introduced.]

John Harsanyi has provided an intriguing argument that social welfare can be expressed as a weighted sum of individual utilities. His theorem has been criticized on the grounds that a central axiom, that social preference satisfies the independence axiom, has the morally unacceptable implication that the process of choice and considerations of ex ante fairness are of no importance. This paper presents a variation of Harsanyi's theorem in which the axioms are compatible with a concern for ex ante fairness. The implied mathematical form for social welfare is a strictly quasi-concave and quadratic function of individual utilities.

Living with risk can lead to anticipatory feelings such as anxiety or hopefulness. Such feelings can affect the choice between lotteries that will be played out in the future—choice may be motivated not only by the (static) risks involved but also by the desire to reduce anxiety or to promote savouring. This paper provides a model of preference in a three-period setting that is axiomatic and includes a role for anticipatory feelings. It is shown that the model of preference can accommodate intuitive patterns of demand for information such as information seeking when a favourable outcome is very likely and information aversion when it is more likely that the outcome will be unfavourable. Behavioural meaning is given to statements such as “individual 1 is anxious” and “2 is more anxious than 1”. Finally, the model is differentiated sharply from the classic model due to Kreps and Porteus.

This paper models an agent in a three-period setting who does not update according to Bayes' Rule and who is self-aware and anticipates her updating behaviour when formulating plans. Gul and Pesendorfer's theory of temptation and self-control is a key building block. The main result is a representation theorem that generalizes (the dynamic version of) Anscombe-Aumann's theorem so that both the prior and the way in which it is updated are subjective. The model can accommodate updating biases analogous to those observed by psychologists. Copyright 2006, Wiley-Blackwell.

A definition of uncertainty or ambiguity aversion is proposed. It is argued that the definition is well-suited to modelling within the Savage (as opposed to Anscombe and Aumann) domain of acts. The defined property of uncertainty aversion has intuitive empirical content, behaves well in specific models of preference (multiple-priors and Choquet expected utility) and is tractable. Tractability is established through use of a novel notion of differentiability for utility functions, called eventwise differentiability. Copyright 1999 by The Review of Economic Studies Limited.

The problem of integrating back from an incomplete set of demand functions to a utility function is considered. Conditions permitting local integrability are analogous to those which arise in local integrability theorems for complete systems. But the analysis of the global integrability of incomplete systems differs markedly from that of complete systems.

Journal Article Duality Theory and Functional Forms for Dynamic Factor Demands Get access Larry G. Epstein Larry G. Epstein University of Toronto Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 48, Issue 1, January 1981, Pages 81–95, https://doi.org/10.2307/2297122 Published: 01 January 1981 Article history Received: 01 July 1979 Accepted: 01 August 1980 Published: 01 January 1981

This paper investigates the testable restrictions on the time-series behavior of consumption and asset returns implied by a representative agent model in which intertemporal preferences are represented by utility functions that generalize conventional, time-additive, expected utility. The model based on these preferences allows a clearer separation of observable behavior attributable to risk aversion and to intertemporal substitution. Further, it nests the predictions of both the consumption CAPM and the static CAPM, and it allows direct tests of the expected utility hypothesis. We find that the performance of the non-expected utility model and tests of the expected utility hypothesis are sensitive to the choice of both consumption measure and instrumental variables.

Strong restrictions on the structure of preferences are a central feature in the received theory of intertemporal allocation. In fact, most of the modern literature concerned with capital-theoretic problems represents preferences by a functional in which an additive utility function is discounted by a constant rate of time preference. This specification is attractive because it is analytically tractable in dynamic models, and it clearly delineates how tastes and opportunities interact to determine an economy's (household's) paths of consumption and capital formation. However, its rigid structure (constancy of time preference) severely limits the conclusions and explanatory power of the corresponding models. This paper considers a class of utility functionals (in continuous time) which have the appealing feature that the rate of time preference depends systematically on an index of aggregate future consumption. The more flexible structure embodied in these functionals leads to important generalizations and modifications of standard conclusions. We highlight this added richness by examining five basic problems in dynamic economic analysis.