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Public abstract
This paper provides a novel framework for assessing the effect of ambiguity on asset values within the Klibanoff-Marinacci-Mukerji (KMM) smooth ambiguity framework. By shifting the analysis into a continuous space of prior probabilities, we establish that ambiguity leads to an adjustment of beliefs (“ambiguity-adjusted probabilities” or “distorted probabilities”) characterized by First-Order Stochastic Dominance (FSD). Leveraging this property, we introduce a systematic economic decomposition of asset valuation separating the baseline risky valuation from the structural cost of uncertainty. Our continuous framework shows that increased ambiguity aversion depresses optimal asset demand.