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Does ambiguity matter? Estimating asset pricing models with a multiple-priors recursive utility

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  • Jeong, Daehee
  • Kim, Hwagyun
  • Park, Joon Y.

Abstract

This paper considers asset pricing models with stochastic differential utility incorporating decision makers׳ concern with ambiguity on true probability measure. Under a representative agent setting, we empirically evaluate alternative preference specifications including a multiple-priors recursive utility. We find that relative risk aversion is estimated around 1–8 with ambiguity aversion and 7.4–15 without ambiguity aversion. Estimated ambiguity aversion is both economically and statistically significant and can explain up to 45% of the average equity premium. The elasticity of intertemporal substitution is higher than one, but its identification appears to be weak, as observed by previous authors.

Suggested Citation

  • Jeong, Daehee & Kim, Hwagyun & Park, Joon Y., 2015. "Does ambiguity matter? Estimating asset pricing models with a multiple-priors recursive utility," Journal of Financial Economics, Elsevier, vol. 115(2), pages 361-382.
  • Handle: RePEc:eee:jfinec:v:115:y:2015:i:2:p:361-382 DOI: 10.1016/j.jfineco.2014.10.003
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    Citations

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    Cited by:

    1. Konstantinos Georgalos, 2016. "Dynamic decision making under ambiguity," Working Papers 112111041, Lancaster University Management School, Economics Department.
    2. repec:eee:jbfina:v:79:y:2017:i:c:p:95-109 is not listed on IDEAS
    3. Berg Cui & Yoosoon Chang & Joon Park, 2017. "Evaluating Consumption CAPM under Heterogeneous Preferences," Caepr Working Papers 2017-013 Classification-G, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    4. repec:eco:journ1:2017-02-66 is not listed on IDEAS
    5. Martin Schneider, 2010. "The Research Agenda: Martin Schneider on Multiple Priors Preferences and Financial Markets," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 11(2), April.
    6. repec:zbw:espost:168350 is not listed on IDEAS

    More about this item

    Keywords

    Recursive utility; Stochastic differential utility; Multiple priors; Ambiguity aversion; Continuous-time conditional mean model; Martingale regression; Time change; Mixed frequency data;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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