Ambiguity Aversion, Asset Pricing, Equity Premium, and Consumption Fluctuations

2007 ◽  
Author(s):  
Irasema Alonso ◽  
Mauricio Prado
Keyword(s):  
Asset Pricing ◽  
Ambiguity Aversion ◽  
Equity Premium ◽  
Consumption Fluctuations

scholarly journals The equity premium in Brock's asset pricing model

2007 ◽  
Vol 31 (7) ◽  
pp. 2263-2292 ◽  
Author(s):  
Levent Akdeniz ◽  
W. Davis Dechert
Keyword(s):  
Asset Pricing ◽  
Equity Premium ◽  
Pricing Model ◽  
Asset Pricing Model

scholarly journals Ambiguity Aversion and the Variance Premium

2019 ◽  
Vol 09 (02) ◽  
pp. 1950003 ◽  
Author(s):  
Jianjun Miao ◽  
Bin Wei ◽  
Hao Zhou
Keyword(s):  
Risk Aversion ◽  
Ambiguity Aversion ◽  
Equity Premium ◽  
Return Variance ◽  
Quantitative Performance ◽  
The Mean ◽  
The Difference ◽  
Risk Free Rate ◽  
Mean Variance ◽  
Free Rate

This paper offers an ambiguity-based interpretation of the variance premium — the difference between risk-neutral and objective expectations of market return variance — as a compounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our calibrated model can match the variance premium, the equity premium, and the risk-free rate in the data. We find that about 97% of the mean–variance premium can be attributed to ambiguity aversion. A three-way separation among ambiguity aversion, risk aversion, and intertemporal substitution, permitted by the smooth ambiguity preferences, plays a key role in our model’s quantitative performance.

scholarly journals Salience and Asset Prices

2013 ◽  
Vol 103 (3) ◽  
pp. 623-628 ◽  
Author(s):  
Pedro Bordalo ◽  
Nicola Gennaioli ◽  
Andrei Shleifer
Keyword(s):  
Asset Pricing ◽  
Simple Model ◽  
Stock Market ◽  
Asset Prices ◽  
Equity Premium ◽  
Market Valuation ◽  
Market Returns ◽  
Stock Market Returns ◽  
Risky Assets ◽  
Very High

We present a simple model of asset pricing in which payoff salience drives investors' demand for risky assets. The key implication is that extreme payoffs receive disproportionate weight in the market valuation of assets. The model accounts for several puzzles in finance in an intuitive way, including preference for assets with a chance of very high payoffs, an aggregate equity premium, and countercyclical variation in stock market returns.

scholarly journals Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?

2000 ◽  
Vol 90 (4) ◽  
pp. 787-805 ◽  
Author(s):  
Stephen G Cecchetti ◽  
Pok-Sang Lam ◽  
Nelson C Mark
Keyword(s):  
Asset Pricing ◽  
Equity Premium ◽  
Equity Returns ◽  
Relative Risk Aversion ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Subjective Beliefs ◽  
Second Moments ◽  
Risk Free Rate ◽  
Free Rate

We study a Lucas asset-pricing model that is standard in all respects, except that the representative agent's subjective beliefs about endowment growth are distorted. Using constant relative risk-aversion (CRRA) utility, with a CRRA coefficient below 10; fluctuating beliefs that exhibit, on average, excessive pessimism over expansions; and excessive optimism over contractions (both ending more quickly than the data suggest), our model is able to match the first and second moments of the equity premium and risk-free rate, as well as the persistence and predictability of excess returns found in the data. (JEL E44, G12)

scholarly journals Equity Premium with Habits, Wealth Inequality and Background Risk

2021 ◽  
Vol 14 (7) ◽  
pp. 321
Author(s):  
Christos I. Giannikos ◽  
Georgios Koimisis
Keyword(s):  
Asset Pricing ◽  
Risk Premium ◽  
Equity Premium ◽  
Wealth Inequality ◽  
Exchange Economy ◽  
Background Risk ◽  
Equity Risk Premium ◽  
Income Uncertainty ◽  
Equity Risk ◽  
Asset Pricing Puzzles

In an exchange economy with endowment inequality, we investigate how preferences with external habits affect the equity risk premium. We show that the dynamics of external additive habits with wealth inequality are complex when a background risk is present. It is ambiguous whether wealth inequality will increase or decrease the equity premium even when the income uncertainty is low. This result extends literature by suggesting that wealth inequality has a small role in explaining asset pricing puzzles.

scholarly journals Consumption-Based Asset Pricing When Consumers Make Mistakes

2021 ◽  
Vol 2021 (015) ◽  
pp. 1-71
Author(s):  
Chris Anderson ◽  
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Equity Premium ◽  
Expected Returns ◽  
Power Utility ◽  
Expected Return ◽  
Risk Return ◽  
Asset Pricing Models ◽  
Long Run ◽  
Wide Range

I analyze the implications of allowing consumers to make mistakes on the risk-return relationships predicted by consumption-based asset pricing models. I allow for consumption mistakes using a model in which a portfolio manager selects investments on a consumer's behalf. The consumer has an arbitrary consumption policy that could reflect a wide range of mistakes. For power utility, expected returns do not generally depend on exposure to single-period consumption shocks, but robustly depend on exposure to both long-run consumption and expected return shocks. I empirically show that separately accounting for both types of shocks helps explain the equity premium and cross section of stock returns.

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