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Ambiguity and the historical equity premium

Fabrice Collard (), Sujoy Mukerji (), Kevin Sheppard () and Jean-Marc Tallon ()
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Jean-Marc Tallon: CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: This paper assesses the quantitative impact of ambiguity on historically observed financial asset returns and growth rates. The single agent, in a dynamic exchange economy, treats the conditional uncertainty about the consumption and dividends next period as ambiguous. We calibrate the agent's ambiguity aversion to match only the first moment of the risk-free rate in data and measure the uncertainty each period on the actual, observed history of (U.S.) macroeconomic growth outcomes. Ambiguity aversion accentuates the conditional uncertainty endogenously in a dynamic way, depending on the history; e.g., it increases during recessions. We show the model implied time series of asset returns substantially match the first and second conditional moments of observed return dynamics. In particular, we find the time-series properties of our model generated equity premium, which may be regarded as an index measure of revealed uncertainty, relates closely to those of the macroeconomic uncertainty index recently developed in Jurado, Ludvigson, and Ng (2013).

Keywords: Ambiguity aversion; Asset pricing; Equity premium puzzle; Time-varying uncertainty; Uncertainty shocks (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-upt
Date: 2016-04
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00594096v4
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Published in 2016

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https://halshs.archives-ouvertes.fr/halshs-00594096v4/document (application/pdf)

Related works:
Journal Article: Ambiguity and the historical equity premium (2018) Downloads
Working Paper: Ambiguity and the historical equity premium (2018)
Working Paper: Ambiguity and the Historical Equity Premium (2017)
Working Paper: Ambiguity and the historical equity premium (2017) Downloads
Working Paper: Ambiguity and the historical equity premium (2016) Downloads
Working Paper: Ambiguity and the historical equity premium (2015)
Working Paper: Ambiguity and the historical equity premium (2012)
Working Paper: Ambiguity and the historical equity premium (2011)
Working Paper: Ambiguity and the historical equity premium (2011) Downloads
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