Asset pricing in a Lucas fruit-tree economy with the best and worst in mind (Q433373)

This paper studies a Lucas fruit-tree economy under the assumption that the agents are Choquet expected utility rather than standard utility decision makers. In contrast to existing models of Lucas-type economies with ambiguity averse agents, this approach gives up dynamic consistency to the effect that quite general ambiguity attitudes become admissible. As the main formal result it establishes the existence of a unique stationary equilibrium price function for this Choquet expected utility Lucas economy. As the main economic insight it obtains a representative agent who is rather preoccupied with the worst case scenario gives rise to a lower risk-free rate and a higher equity premium than predicted by the original expected utility Lucas economy. This difference is the greater the more surpricing the economic information is that the agent receives.