Does ambiguity matter? Estimating asset pricing models with a multiple-priors recursive utility Academic Article uri icon

abstract

  • 2014 Elsevier B.V. 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.

published proceedings

  • JOURNAL OF FINANCIAL ECONOMICS

altmetric score

  • 3

author list (cited authors)

  • Jeong, D., Kim, H., & Park, J. Y.

citation count

  • 36

complete list of authors

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

publication date

  • February 2015