Abstract The alpha-maxmin model is a prominent example of preferences under Knightian uncertainty as it allows to distinguish ambiguity and ambiguity attitude. These preferences are dynamically inconsistent for nontrivial versions of alpha. In this paper, we derive a recursive, dynamically consistent version of the alpha‐maxmin model. In the continuous‐time limit, the resulting dynamic utility function can be represented as a convex mixture between worst and best case, but now at the local, infinitesimal level.

We study the properties of the utility function and provide an Arrow–Pratt approximation of the static and dynamic certainty equivalent. We then derive a consumption‐based capital asset pricing formula and study the implications for derivative valuation under indifference pricing.

本文2020年7月正式发表于Mathematical Finance第30卷，该期刊为武汉大学经济与管理学院金融学A-类期刊。

论文链接https://doi.org/10.1111/mafi.12232