Macroeconomic Uncertainty Prices when Beliefs are Tenuous

A representative investor does not know which member of a set of well-defined parametric "structured models'' is best. The investor also suspects that all of the structured models are misspecified. These uncertainties about probability distributions of risks give rise to components of equilibrium prices that differ from the risk prices widely used in asset pricing theory. A quantitative example highlights a representative investor's uncertainties about the size and persistence of macroeconomic growth rates. Our model of preferences under ambiguity puts nonlinearities into marginal valuations that induce time variations in market prices of uncertainty. These arise because the representative investor especially fears high persistence of low growth rate states and low persistence of high growth rate states.