Does Smooth Ambiguity Matter for Asset Pricing?

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 cons...

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Bibliographic Details
Published in:The Review of financial studies 2019-09, Vol.32 (9), p.3617-3666
Main Authors: Gallant, A. Ronald, Jahan-Parvar, Mohammad R., Liu, Hening
Format: Article
Language:English
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Summary: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 longrun risk model. We also analyze asset pricing implications of the estimated models.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhy118