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Ambiguity, long-run risks, and asset prices in continuous time

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  • Ruan, Xinfeng

Abstract

This paper extends the long-run risks (LRR) models coined by Bansal and Yaron (2004) and Bansal, Kiku, and Yaron (2012) with Epstein and Zin’s (1989) recursive preferences into the LRR models with Chen and Epstein’s (2002) recursive multiple-priors utility, which captures the investor’s ambiguity on uncertainties. Our empirical analysis shows that considering ambiguity on uncertainties, in particular, large ambiguity on the long-run risks, in the LRR models can significantly improve the fitting performance of the equity premium and the risk-free rate when using a low relative risk aversion coefficient.

Suggested Citation

  • Ruan, Xinfeng, 2021. "Ambiguity, long-run risks, and asset prices in continuous time," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 115-126.
    • Handle: RePEc:eee:reveco:v:71:y:2021:i:c:p:115-126
    DOI: 10.1016/j.iref.2020.09.007
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    References listed on IDEAS

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    More about this item

    Keywords

    Ambiguity; Multiple priors; Long-run risks; Equity premium puzzle; Risk-free rate puzzle;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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