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Ambiguity and the historical equity premium

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Author Info

  • Fabrice Collard

    ()
    (Department of Economics - University of Bern - University of Bern)

  • Sujoy Mukerji

    ()
    (Department of Economics and University College - University of Oxford)

  • Kevin Sheppard

    ()
    (Department of Economics and Oxford-Man Institute of Quantitative Finance - University of Oxford)

  • Jean-Marc Tallon

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

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 uncertainty about the conditional mean of the probability distribution on consumption and dividends in the next period as ambiguous, an ambiguity that is endogenously dynamic, e.g., increasing during recessions. We calibrate ambiguity aversion to match only the first moment of the risk-free rate in data and, importantly, the (conditional) ambiguity to match the uncertainty conditional on the actual history of macroeconomic growth outcomes. The model matches observed asset return dynamics very substantially.

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File URL: http://halshs.archives-ouvertes.fr/docs/00/73/86/08/PDF/11032-2.pdf
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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00594096.

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Date of creation: May 2011
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Handle: RePEc:hal:cesptp:halshs-00594096

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00594096
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Related research

Keywords: Equity premium; ambiguity.;

This paper has been announced in the following NEP Reports:

References

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  1. Jesús Fernández-Villaverde & Juan Rubio-Ramírez, 2010. "Macroeconomics and Volatility: Data, Models, and Estimation," NBER Working Papers 16618, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Ambiguity and the historical equity premium
    by Christian Zimmermann in NEP-DGE blog on 2011-06-01 14:15:29
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Cited by:
  1. Jianjun Miao & Bin Wei & Hao Zhou, 2012. "Ambiguity Aversion and Variance Premium," Boston University - Department of Economics - Working Papers Series WP2012-009, Boston University - Department of Economics.
  2. Massimo Guidolin & Francesca Rinaldi, 2011. "Ambiguity in Asset Pricing and Portfolio Choice: A Review of the Literature," Working Papers 417, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Ruffino, Doriana, 2013. "A Robust Capital Asset Pricing Model," Finance and Economics Discussion Series 2014-1, Board of Governors of the Federal Reserve System (U.S.).
  4. Michèle Cohen & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2009. "An experimental investigation of imprecision attitude and its relation with risk attitude and impatience," Documents de travail du Centre d'Economie de la Sorbonne 09029, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  5. Oliver Walker & Simon Dietz, 2011. "A representation result for choice under conscious unawareness," Grantham Research Institute on Climate Change and the Environment Working Papers 59, Grantham Research Institute on Climate Change and the Environment.
  6. Ju, Nengjiu & Miao, Jianjun, 2009. "Ambiguity, Learning, and Asset Returns," MPRA Paper 14737, University Library of Munich, Germany, revised Apr 2009.

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