Ambiguity, Learning, and Asset Returns

Nengjiu Ju and Jianjun Miao

No 438, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and 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 e?ect, 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)
JEL-codes: D81 E44 G12 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2010-11
New Economics Papers: this item is included in nep-cba, nep-dge and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Forthcoming in Econometrica.

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http://down.aefweb.net/WorkingPapers/w438.pdf (application/pdf)

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:cuf:wpaper:438

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