Investors face uncertainty over models when they do not know which member of a set of well-defined “structured models” is best. They face uncertainty about mod-els when they suspect that all of the structured models might be misspecified. We refer to worries about the first type of ignorance as ambiguity concerns and worries about the second type as misspecification concerns. These two types of ignorance about probability distributions of risks add what we call uncertainty components to equilibrium prices of those risks. A quantitative example highlights a representative investor’s uncertainties about the size and persistence of macroeconomic growth rates. Our model of preferences under concerns about model ambiguity and misspecification puts nonlinearities into marginal valuations that induce time variations in market prices of uncertainty. These reflect the representative investor’s fears of high persistence of low growth rate states and low persistence of high growth rate states.

More on this topic

BFI Working Paper·May 5, 2026

The Success of the Embedded State in England

Leander Heldring, Davis Kedrosky, James Robinson, and Matthias Weigand
Topics: Fiscal Studies
BFI Working Paper·Mar 18, 2026

Stimulating Auto Markets

David W. Berger, Geoffrey Gee, Nick Turner, and Eric Zwick
Topics: Fiscal Studies
BFI Working Paper·Mar 6, 2026

Efficiency, Insurance, and Redistribution Effects of Government Policies

Anmol Bhandari, David Evans, Mikhail Golosov, and Thomas J. Sargent
Topics: Fiscal Studies