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

Xinfeng Ruan

doi:10.1016/j.iref.2020.09.007

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

Xinfeng Ruan

University of Otago

Research output: Contribution to journal › Article › peer-review

3 Citations (Scopus)

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.

Original language	English
Pages (from-to)	115-126
Number of pages	12
Journal	International Review of Economics and Finance
Volume	71
DOIs	https://doi.org/10.1016/j.iref.2020.09.007
Publication status	Published - Jan 2021
Externally published	Yes

Keywords

Ambiguity
Equity premium puzzle
Long-run risks
Multiple priors
Risk-free rate puzzle

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10.1016/j.iref.2020.09.007

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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.",

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AB - 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.

KW - Ambiguity

KW - Equity premium puzzle

KW - Long-run risks

KW - Multiple priors

KW - Risk-free rate puzzle

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JO - International Review of Economics and Finance

JF - International Review of Economics and Finance

ER -

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

Abstract

Keywords

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