A Robust General Equilibrium Stochastic Volatility Model with Recursive Preference Investors
This paper investigates the implications of model uncertainty for the equity premium in a stochastic volatility model. We consider a general equilibrium setting with one representative agent who has a stochastic differential utility. The results show that the equilibrium equity premium consists of a market risk premium, a stochastic volatility risk premium and an uncertainty aversion premium. Further, the robustness can increase the equilibrium equity premium and drive down the equilibrium risk-free rate.
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