Learning and Asset Prices under Ambiguous Information

We propose a new continuous time framework to study asset prices under learning and ambiguity aversion. In a partial information Lucas economy with time additive power utility, a discount for ambiguity arises if and only if the elasticity of intertemporal substitution (EIS) is above one. Then, ambiguity increases equity premia and volatilities, and lowers interest rates. Very low EIS estimates are consistent with EIS parameters above one, because of a downward bias in Euler-equations-based least-squares regressions. Ambiguity does not resolve asymptotically and, for high EIS, it is consistent with the equity premium, the low interest rate, and the excess volatility puzzles.