Ambiguity aversion boosts equilibrium interest rates in asset pricing model.
The article explores how people's fear of uncertainty affects investment decisions and asset prices. By adding ambiguity aversion to a model, the researchers found that uncertainty can impact optimal investment, consumption, and equity premium. They discovered that as people become more averse to ambiguity, interest rates go up. This study separates the effects of risk aversion and ambiguity aversion on equity premium.