Ambiguity Aversion and the Variance Premium

Jianjun Miao, Bin Wei and Hao Zhou
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Hao Zhou: PBC School of Finance, Tsinghua University, 43 Chengfu Road, Haidian District, Beijing 100083, China

Quarterly Journal of Finance (QJF), 2019, vol. 09, issue 02, 1-36

Abstract: This paper offers an ambiguity-based interpretation of the variance premium — the difference between risk-neutral and objective expectations of market return variance — as a compounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our calibrated model can match the variance premium, the equity premium, and the risk-free rate in the data. We find that about 97% of the mean–variance premium can be attributed to ambiguity aversion. A three-way separation among ambiguity aversion, risk aversion, and intertemporal substitution, permitted by the smooth ambiguity preferences, plays a key role in our model’s quantitative performance.

Keywords: Ambiguity aversion; learning; variance premium; regime-shift; belief distortion (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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http://www.worldscientific.com/doi/abs/10.1142/S2010139219500034
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Related works:
Working Paper: Ambiguity Aversion and Variance Premium (2018)
Working Paper: Ambiguity Aversion and Variance Premium (2012)
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DOI: 10.1142/S2010139219500034

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