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: C13 C32 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X14002128
Full text for ScienceDirect subscribers only

Related works:
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:eee:jfinec:v:115:y:2015:i:2:p:361-382

DOI: 10.1016/j.jfineco.2014.10.003

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().