This paper studies asset and option pricing implications of Knightian uncertainty about capital shocks in a general equilibrium production-based jump-diffusion model with recursive preferences. Our model reproduces several directional properties of prices in financial markets such as negative variance premium, negative skewness premium and implied volatility skew. Our calibrated model to economic and financial data shows that options demand increases in the presence of ambiguity, which implies an upward shift in the implied volatility curve. Finally, we compute the maximum consumption tax that society would be willing to pay to change the economy so that model uncertainty is eliminated.

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