EconPapers    
Economics at your fingertips  
 

Ambiguity, Learning, and Asset Returns

Nengjiu Ju and Jianjun Miao

No wp2009-014, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We propose a novel generalized recursive smooth ambiguity model which allows a three-way separation among risk aversion, ambiguity aversion, and intertemporal substitution. We apply this utility to a consumption-based asset pricing model in which consumption and dividends follow hidden Markov regime-switching processes. Our calibrated model can match the mean equity premium, the mean riskfree rate, and the volatility of the equity premium observed in the data. In addition, our model can generate a variety of dynamic asset pricing phenomena, including the procyclical variation of price-dividend ratios, the countercyclical variation of equity premia and equity volatility, and the mean reversion of excess returns. The key intuition is that an ambiguity averse agent behaves pessimistically by attaching more weight to the pricing kernel in bad times when his continuation values are low.

Keywords: Ambiguity aversion; learning; asset pricing puzzles; model uncertainty; robustness; pessimism (search for similar items in EconPapers)
JEL-codes: D81 E44 G12 (search for similar items in EconPapers)
Pages: 35
References: Add references at CitEc
Citations: View citations in EconPapers (22)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Ambiguity, Learning, and Asset Returns (2012) Downloads
Working Paper: AMBIGUITY, LEARNING, AND ASSET RETURNS (2010)
Working Paper: Ambiguity, Learning, and Asset Returns (2010) Downloads
Working Paper: Ambiguity, Learning, and Asset Returns (2009) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2009-014

Access Statistics for this paper

More papers in Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Program Coordinator (iedcoord@bu.edu).

 
Page updated 2025-02-14
Handle: RePEc:bos:wpaper:wp2009-014