Ambiguity, risk and asset returns in continuous time

Existing models in stochastic continuous-time settings assume that beliefs are represented by a probability measure. As illustrated by the Ellsberg Paradox, this feature rules out a priori any concern with ambiguity. This paper formulates a continuous-time intertemporal version of multiple-priors utility, where aversion to ambiguity is admissible. When applied to a representative agent asset market setting, the model delivers restrictions on excess returns that admit interpretations reflecting a premium for risk and a seperate premium for ambiguity.