TY - JOUR
T1 - Ambiguity on uncertainty and the equity premium
AU - Ruan, Xinfeng
AU - Zhang, Jin E.
N1 - Publisher Copyright:
© 2020 Elsevier Inc.
PY - 2021/1
Y1 - 2021/1
N2 - This paper considers an asset pricing model with a multiple-priors recursive utility incorporating decision makers’ concern with ambiguity on drift and jumps of driving process. Based on our empirical evidence, given a small relative risk aversion (RRA) coefficient (e.g., RRA = 2), the model can well explain the equity premium puzzle, since the ambiguity aversion, as a complementary aversion of the risk aversion, can increase the equity premium and decrease the risk-free rate. This paper documents that ambiguity on uncertainty is a resolution of the equity premium puzzle.
AB - This paper considers an asset pricing model with a multiple-priors recursive utility incorporating decision makers’ concern with ambiguity on drift and jumps of driving process. Based on our empirical evidence, given a small relative risk aversion (RRA) coefficient (e.g., RRA = 2), the model can well explain the equity premium puzzle, since the ambiguity aversion, as a complementary aversion of the risk aversion, can increase the equity premium and decrease the risk-free rate. This paper documents that ambiguity on uncertainty is a resolution of the equity premium puzzle.
KW - Ambiguity
KW - Equity premium puzzle
KW - Multiple priors
UR - http://www.scopus.com/inward/record.url?scp=85078046937&partnerID=8YFLogxK
U2 - 10.1016/j.frl.2020.101429
DO - 10.1016/j.frl.2020.101429
M3 - Article
AN - SCOPUS:85078046937
SN - 1544-6123
VL - 38
JO - Finance Research Letters
JF - Finance Research Letters
M1 - 101429
ER -