Ambiguity Aversion and Variance Premium
Jianjun Miao (),
Bin Wei and
Hao Zhou ()
Authors registered in the RePEc Author Service: Hao Zhao
No 2018-14, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta
This paper offers an ambiguity-based interpretation of variance premium?the difference between risk-neutral and objective expectations of market return variance?as a compounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our approach endogenously generates variance premium without imposing exogenous stochastic volatility or jumps in consumption process. Such a framework can reasonably match the mean variance premium as well as the mean equity premium, equity volatility, and the mean risk-free rate in the data. We find that about 96 percent of the mean variance premium can be attributed to ambiguity aversion. Applying the model to historical consumption data, we find that variance premium mostly captures depressions, deep recessions, and financial panics, with a postwar peak in 2009.
Keywords: ambiguity aversion; learning; variance premium; regime shift; belief distortion (search for similar items in EconPapers)
JEL-codes: D81 E44 G12 G13 (search for similar items in EconPapers)
Pages: 41 pages
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://www.frbatlanta.org/-/media/documents/resea ... emium-2018-12-05.pdf Full text (application/pdf)
Journal Article: Ambiguity Aversion and the Variance Premium (2019)
Working Paper: Ambiguity Aversion and Variance Premium (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:2018-14
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta Contact information at EDIRC.
Bibliographic data for series maintained by ().