Ambiguity, Learning, and Asset Returns

Nengjiu Ju and Jianjun Miao

MPRA Paper from University Library of Munich, Germany

Abstract: We propose a novel generalized recursive smooth ambiguity model which allows a three-way separation among risk aversion, ambiguity aversion, and intertemporal substitution. We apply this utility 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 riskfree 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, 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 (search for similar items in EconPapers)
JEL-codes: D81 G12 (search for similar items in EconPapers)
Date: 2009-04, Revised 2009-04
New Economics Papers: this item is included in nep-dge and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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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 (2010)
Working Paper: Ambiguity, Learning, and Asset Returns
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:14737

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