Ambiguity Aversion and Asset Prices in Production Economies

We examine a production-based asset-pricing model with an unobservable mean growth rate following a two-state Markov chain and with an ambiguity-averse representative agent. Our model requires a low coefficient of relative risk aversion to produce: (i) a high equity premium and volatile equity retur...

Full description

Saved in:
Bibliographic Details
Published in:The Review of financial studies 2014-10, Vol.27 (10), p.3060-3097
Main Authors: Jahan-Parvar, Mohammad R., Liu, Hening
Format: Article
Language:English
Subjects:
Abnormal returns
Agency theory
Ambiguity
Asset pricing
Commercial production
Economic models
Economic theory
Equity
Growth models
Macroeconomic modeling
Macroeconomics
Market prices
Markov analysis
Markovian processes
Modeling
Price premiums
Production economics
Risk aversion
Risk management
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We examine a production-based asset-pricing model with an unobservable mean growth rate following a two-state Markov chain and with an ambiguity-averse representative agent. Our model requires a low coefficient of relative risk aversion to produce: (i) a high equity premium and volatile equity returns, (ii) a low and smooth risk-free rate, (iii) smooth consumption growth and volatile investment growth, (iv) countercyclical equity premium and market price of risk, (v) conditional heteroscedasticity in returns, and (vi) long-horizon predictability of excess returns.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhu037