EconPapers    
Economics at your fingertips  
 

When Uncertainty and Volatility Are Disconnected: Implications for Asset Pricing and Portfolio Performance

Yacine Ait-Sahalia, Felix Matthys, Emilio Osambela and Ronnie Sircar

No 29195, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze an environment where the uncertainty in the equity market return and its volatility are both stochastic, and may be potentially disconnected. We solve a representative investor's optimal asset allocation and derive the resulting conditional equity premium and risk-free rate in equilibrium. Our empirical analysis shows that the equity premium appears to be earned for facing uncertainty, especially high uncertainty that is disconnected from lower volatility, rather than for facing volatility as traditionally assumed. Incorporating the possibility of a disconnect between volatility and uncertainty significantly improves portfolio performance, over and above the performance obtained by conditioning on volatility only.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-fmk, nep-isf, nep-ore and nep-rmg
Note: AP
References: Add references at CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Published as Yacine Aït-Sahalia & Felix Matthys & Emilio Osambela & Ronnie Sircar, 2024. "When uncertainty and volatility are disconnected: Implications for asset pricing and portfolio performance," Journal of Econometrics, .

Downloads: (external link)
http://www.nber.org/papers/w29195.pdf (application/pdf)

Related works:
Working Paper: When Uncertainty and Volatility Are Disconnected: Implications for Asset Pricing and Portfolio Performance (2021) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:29195

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w29195

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2024-02-13
Handle: RePEc:nbr:nberwo:29195