Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/201618
Authors: 
Beißner, Patrick
Lin, Qian
Riedel, Frank
Year of Publication: 
2017
Series/Report no.: 
Center for Mathematical Economics Working Papers 593
Abstract: 
The alpha-maxmin model is a prominent example of preferences under Knightian uncertainty as it allows to distinguish ambiguity and ambiguity attitude. These preferences are dynamically inconsistent for nontrivial versions of ». In this paper, we derive a recursive, dynamically consistent version of the »-maxmin model. In the continuous-time limit, the resulting dynamic utility function can be represented as a convex mixture between worst and best case, but now at the local, infinitesimal level. We study the properties of the utility function and provide an Arrow- Pratt approximation of the static and dynamic certainty equivalent. We derive a consumption-based capital asset pricing formula and study the implications for derivative valuation under indifference pricing.
Subjects: 
Dynamic consistency
alpha-maxmin expected utility
Knightian uncertainty
ambiguity attitude
JEL: 
C60
D81
D90
Persistent Identifier of the first edition: 
Document Type: 
Working Paper
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