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Does ambiguity matter? Estimating asset pricing models with a multiple-priors recursive utility

Daehee Jeong, Hwagyun Kim () and Joon Y. Park

Journal of Financial Economics, 2015, vol. 115, issue 2, 361-382

Abstract: This paper considers asset pricing models with stochastic differential utility incorporating decision makers׳ concern with ambiguity on true probability measure. Under a representative agent setting, we empirically evaluate alternative preference specifications including a multiple-priors recursive utility. We find that relative risk aversion is estimated around 1–8 with ambiguity aversion and 7.4–15 without ambiguity aversion. Estimated ambiguity aversion is both economically and statistically significant and can explain up to 45% of the average equity premium. The elasticity of intertemporal substitution is higher than one, but its identification appears to be weak, as observed by previous authors.

Keywords: Recursive utility; Stochastic differential utility; Multiple priors; Ambiguity aversion; Continuous-time conditional mean model; Martingale regression; Time change; Mixed frequency data (search for similar items in EconPapers)
JEL-codes: G12 C13 C32 (search for similar items in EconPapers)
Date: 2015
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