Working Paper

Does Smooth Ambiguity Matter for Asset Pricing?


Abstract: We use the Bayesian method introduced by Gallant and McCulloch (2009) to estimate consumption-based asset pricing models featuring smooth ambiguity preferences. We rely on semi-nonparametric estimation of a flexible auxiliary model in our structural estimation. Based on the market and aggregate consumption data, our estimation provides statistical support for asset pricing models with smooth ambiguity. Statistical model comparison shows that models with ambiguity, learning and time-varying volatility are preferred to the long-run risk model. We analyze asset pricing implications of the estimated models.

Keywords: Ambiguity; Bayesian estimation; equity premium; Markov-switching; long-run risk;

JEL Classification: C61; D81; G11; G12;

https://doi.org/10.17016/IFDP.2018.1221

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File(s): File format is application/pdf https://www.federalreserve.gov/econres/ifdp/files/ifdp1221.pdf

Authors

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2018-01

Number: 1221

Pages: 83 pages