Volatility Ambiguity, Portfolio Decisions, and Equilibrium Asset Pricing

Yu Liu (), Hao Wang (), Tan Wang () and Lihong Zhang ()
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Yu Liu: Institute of Finance and School of Economics, Jinan University, Guangzhou 510632, China
Hao Wang: School of Economics and Management, Tsinghua University, Beijing 100084, China
Tan Wang: Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Shanghai 200240, China
Lihong Zhang: School of Economics and Management, Tsinghua University, Beijing 100084, China

Management Science, 2025, vol. 71, issue 6, 5185-5203

Abstract: This paper develops a new approach to volatility ambiguity and studies its implications for equilibrium consumption, portfolio choice, and asset prices. Our approach does not require equivalence between priors. The measure of ambiguity is based on the statistical confidence in the reference model that can be assessed with sample statistics. The approach is analytically tractable and amenable to empirical/calibration analysis. A stochastic discount pricing formula is given. At sensible levels of volatility ambiguity, the empirical regularity of equity premium and consumption growth in U.S. data can be the equilibrium outcome of our model featuring a relative risk aversion (RRA) coefficient within a reasonable range.

Keywords: maxmin expected utility; variance-covariance ambiguity; prior equivalence; equity premium (search for similar items in EconPapers)
Date: 2025
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