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AMBIGUITY, LEARNING, AND ASSET RETURNS
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AMBIGUITY, LEARNING, AND ASSET RETURNS
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Journal Article
AMBIGUITY, LEARNING, AND ASSET RETURNS
2012
Overview
We propose a novel generalized recursive smooth ambiguity model which permits a three-way separation among risk aversion, ambiguity aversion, and intertemporal substitution. We apply this utility model 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 risk-free 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, the leverage effect, 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.
Publisher
Econometric Society,Blackwell Publishing Ltd,Wiley-Blackwell
Subject
/ Assets
/ CAPM
/ Entscheidung unter Unsicherheit
/ Equity
/ Exact sciences and technology
/ Inference from stochastic processes; time series analysis
/ Insurance, economics, finance
/ Learning
/ Lernen
/ Modeling
/ Probability theory and stochastic processes
/ Risk
/ Sciences and techniques of general use
/ Studies
/ Theorie
