AMBIGUITY, LEARNING, AND ASSET RETURNS

Jianjun Miao and Nengjiu Ju ()
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Nengjiu Ju: Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong and SAIF, Shanghai Jiaotong University, China

No WP2010-031, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We propose a novel generalized recursive smooth ambiguity model which permits a three-way separation among risk aversion, ambiguity aversion, and intertemporal substitution. We apply this utility model to a consumption-based asset-pricing model in which consumption and dividends follow hidden Markov regime-switching processes. Our calibrated model can match the mean equity premium, the mean risk-free rate, and the volatility of the equity premium observed in the data. In addition, our model can generate a variety of dynamic asset-pricing phenomena, including the procyclical variation of price–dividend ratios, the countercyclical variation of equity premia and equity volatility, the leverage effect, and the mean reversion of excess returns. The key intuition is that an ambiguity-averse agent behaves pessimistically by attaching more weight to the pricing kernel in bad times when his continuation values are low.

Keywords: Ambiguity aversion; learning; asset-pricing puzzles; model uncertainty; robustness; pessimism; regime switching. (search for similar items in EconPapers)
Pages: 34 pages
Date: 2010-01
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Ambiguity, Learning, and Asset Returns (2012)
Working Paper: Ambiguity, Learning, and Asset Returns (2010)
Working Paper: Ambiguity, Learning, and Asset Returns (2009)
Working Paper: Ambiguity, Learning, and Asset Returns
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Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2010-031

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