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Doubts and variability: A robust perspective on exotic consumption series

Rhys Bidder () and M.E. Smith

Journal of Economic Theory, 2018, vol. 175, issue C, 689-712

Abstract: Consumption-based asset-pricing models have experienced success in recent years by augmenting the consumption process in ‘exotic’ ways. Two notable examples are the Long-Run Risk and rare disaster frameworks. Such models are difficult to characterize from consumption data alone. Accordingly, concerns have been raised regarding their specification. Acknowledging that both phenomena are naturally subject to ambiguity, we show that an ambiguity-averse agent may behave as if Long-Run Risk and disasters exist even if they do not or exaggerate them if they do. Consequently, prices may be misleading in characterizing these phenomena since they encode a pessimistic perspective of the data-generating process.

Keywords: Ambiguity; Robustness; Uncertainty; Disasters; Asset pricing; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: D11 C63 D51 D81 E17 G12 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Doubts and Variability: A Robust Perspective on Exotic Consumption Series (2015) Downloads
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