Working Paper: NBER ID: w29915
Authors: Cosmin L. Ilut; Martin Schneider
Abstract: We survey literature on ambiguity with an emphasis on recent applications in macroeconomics and finance. Like risk, ambiguity leads to cautious behavior and uncertainty premia in asset markets. Unlike risk, ambiguity can generate first order welfare losses. As a result, precautionary behavior and ambiguity premia obtain even when agents have linear utility and are reflected in linear approximations to model dynamics. Quantitative work exploits this insight to estimate models that jointly match the dynamics of asset prices and macro aggregates. In micro data, inertia and inaction due to ambiguity help understand patterns such as non-participation in asset markets, price rigidities and simple contracts. Learning under ambiguity generates asymmetric responses to news that help connect higher moments in micro and macro data. Survey evidence is increasingly used to provide direct evidence on ambiguity averse behavior, as well as to discipline quantitative models.
Keywords: Ambiguity; Uncertainty; Asset Pricing; Welfare; Macroeconomics
JEL Codes: D81; E21; E32; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ambiguity (D84) | cautious behavior (D91) |
| cautious behavior (D91) | lower participation in asset markets (G19) |
| ambiguity (D84) | first-order welfare losses (D69) |
| ambiguity (D84) | precautionary behavior (D91) |
| precautionary behavior (D91) | savings (D14) |
| precautionary behavior (D91) | hiring decisions (M51) |
| precautionary behavior (D91) | debt issuance (H63) |
| higher uncertainty (D89) | lower asset prices (G19) |
| learning under ambiguity (D80) | asymmetric responses to news (D80) |
| information received (Y50) | agents' behaviors (L85) |