Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Mar, 2012, Volume 80, Issue 2

Ambiguity, Learning, and Asset Returns
p. 559-591

Nengjiu Ju, Jianjun Miao

We propose a novel generalized recursive smooth ambiguity model which permits a three‐way separation among risk aversion, ambiguity aversion, and intertemporal substitution. We apply this utility model to a consumption‐based asset‐pricing model in which consumption and dividends follow hidden Markov regime‐switching processes. Our calibrated model can match the mean equity premium, the mean risk‐free rate, and the volatility of the equity premium observed in the data. In addition, our model can generate a variety of dynamic asset‐pricing phenomena, including the procyclical variation of price–dividend ratios, the countercyclical variation of equity premia and equity volatility, the leverage effect, and the mean reversion of excess returns. The key intuition is that an ambiguity‐averse agent behaves pessimistically by attaching more weight to the pricing kernel in bad times when his continuation values are low.

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Supplemental Material

Supplement to "Ambiguity, Learning, and Asset Returns"

This technical appendix describes the numerical method used to solve the model in the paper.

Supplement to "Ambiguity, Learning, and Asset Returns"

A zip file containing the replication files for the manuscript.