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Ambiguity and the historical equity premium

Fabrice Collard (), Sujoy Mukerji (), Kevin Sheppard () and Jean-Marc Tallon ()
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Kevin Sheppard: Department of Economics and Oxford-Man Institute of Quantitative Finance - University of Oxford

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: This paper assesses the quantitative impact of ambiguity on the historically observed financial asset returns and prices. 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 condition 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 asser returns match observed return dynamics of first and second conditional moments, very substantially. 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 very closely to those of the macroeconomic uncertainty index recently developed in Jurado, Ludvigson, and Ng (2013)

Keywords: Ambiguity Aversion; Asset pricing; Equity premium puzzle; uncertainty shocks; time-varying uncertainty (search for similar items in EconPapers)
JEL-codes: G12 E21 D81 C63 (search for similar items in EconPapers)
Date: 2011-05, Revised 2015-01
New Economics Papers: this item is included in nep-his, nep-mac and nep-upt
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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 (2016) Downloads
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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