Advanced Search
MyIDEAS: Login

Ambiguity Aversion and Variance Premium

Contents:

Author Info

  • Jianjun Miao

    ()
    (Department of Economics, Boston University)

  • Bin Wei

    ()
    (Capital Markets Section, Federal Reserve Board)

  • Hao Zhou

    ()
    (Capital Markets Section, Federal Reserve Board)

Abstract

This paper offers an ambiguity-based interpretation of variance premium - the differ- ence between risk-neutral and objective expectations of market return variance - as a com- pounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our approach endogenously generates variance premium without impos- ing exogenous stochastic volatility or jumps in consumption process. Such a framework can reasonably match the mean variance premium as well as the mean equity premium, equity volatility, and the mean risk-free rate in the data. We find that about 96 percent of the mean variance premium can be attributed to ambiguity aversion. Applying the model to historical consumption data, we find that variance premium mostly captures depressions, deep recessions, and financial panics, with a post war peak in 2009.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://people.bu.edu/miaoj/VRP18.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2012-009.

as in new window
Length: 41 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:bos:wpaper:wp2012-009

Contact details of provider:
Postal: 270 Bay State Road, Boston, MA 02215
Phone: 617-353-4389
Fax: 617-353-444
Web page: http://www.bu.edu/econ/
More information through EDIRC

Related research

Keywords: Ambiguity aversion; learning; variance premium; regime-shift; belief distortion;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Hui Chen & Nengjiu Ju & Jianjun Miao, . "Dynamic Asset Allocation with Ambiguous Return Predictability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  2. Miao, Jianjun & Hayashi, Takashi, 2011. "Intertemporal substitution and recursive smooth ambiguity preferences," Theoretical Economics, Econometric Society, vol. 6(3), September.
  3. Zengjing Chen & Larry G. Epstein, 2000. "Ambiguity, risk and asset returns in continuous time," RCER Working Papers 474, University of Rochester - Center for Economic Research (RCER).
  4. Fabrice Collard & Sujoy Mukerji & Kevin Sheppard & Jean-Marc Tallon, 2011. "Ambiguity and the historical equity premium," Documents de travail du Centre d'Economie de la Sorbonne 11032r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Aug 2012.
  5. Nengjiu Ju & Jianjun Miao, 2012. "Ambiguity, Learning, and Asset Returns," Econometrica, Econometric Society, vol. 80(2), pages 559-591, 03.
  6. Epstein, Larry G. & Miao, Jianjun, 2003. "A two-person dynamic equilibrium under ambiguity," Journal of Economic Dynamics and Control, Elsevier, vol. 27(7), pages 1253-1288, May.
  7. Philippe Mueller & Andrea Vedolin & Hao Zhou, 2011. "Short Run Bond Risk Premia," FMG Discussion Papers dp686, Financial Markets Group.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bos:wpaper:wp2012-009. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Courtney Sullivan).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.