Life-Cycle Asset Allocation with Ambiguity Aversion and Learning

I show that ambiguity (Knightian uncertainty) and learning about the equity premium can simultane- ously explain the low fraction of financial wealth allocated to stocks over the life cycle as well as the stock market participation puzzle. I assume that individuals are ambiguous about the size of the equity premium and are averse with respect to this ambiguity, which results in a lower optimal allocation to stocks over the life cycle. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity aversion leads to higher saving rates.