Review of Financial Studies Vol. 27 No. 10 2014
Ambiguity Aversion and Asset Prices in Production Economies
open access
Abstract
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.
- DOI
- 10.1093/rfs/hhu037
- Volume
- 27
- Issue
- 10
- Pages
- 3060-3097
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref