Optimal long-term financing under ambiguous volatility

I study a continuous-time principal-agent model with hidden action in which the principal and the agent have ambiguous beliefs about the volatility of the project cash flows. I describe a novel formulation that captures uncertainty about the underlying volatility process show how it affects the optimal contract. Ambiguity aversion generates endogenous belief heterogeneity between the principal and the agent. Under the optimal contract, the agent always trusts the benchmark probability model, while the principal forms expectations as if volatility is strictly higher and state-dependent. Additionally, I show ambiguity aversion generates asset pricing implications for the implied financial securities.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2018

Author dc:creator

• Hansen, Peter G. (Peter Giles)

Advisor dc:contributor.advisor

• Andrey Malenko.

• Sloan School of Management.

Statement dc:rights

• MIT theses are protected by copyright. They may be viewed, downloaded, or printed from this source but further reproduction or distribution in any format is prohibited without written permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/118011

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/118011