A Robust General Equilibrium Stochastic Volatility Model with Recursive Preference Investors

Weidong Xu, Hongyi Li () and Chongfeng Wu
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Weidong Xu: School of Management, Zhejiang University
Chongfeng Wu: Financial Engineering Research Center, Shanghai Jiaotong University

Annals of Economics and Finance, 2011, vol. 12, issue 2, 217-231

Abstract: This paper investigates the implications of model uncertainty for the equity premium in a stochastic volatility model. We consider a general equilibrium setting with one representative agent who has a stochastic differential utility. The results show that the equilibrium equity premium consists of a market risk premium, a stochastic volatility risk premium and an uncertainty aversion premium. Further, the robustness can increase the equilibrium equity premium and drive down the equilibrium risk-free rate.

Keywords: General equilibrium; Robust control; Stochastic volatility model; Equity premium (search for similar items in EconPapers)
JEL-codes: C61 D51 D81 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2011:v:12:i:2:p:217-231

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