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Author: Louis R. Piccotti
Publisher:
ISBN:
Category :
Languages : en
Pages : 61
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Book Description
We derive the equilibrium asset expected returns when there is ambiguity in asset expected returns, as well as ambiguity in asset return variances. In our model, ambiguity risk is systematic in nature and is non-diversifiable. Under regularity conditions, expected asset returns are linearly increasing in variance risk and ambiguity risk. We show that a beta pricing model can be derived from the equilibrium expected return function, which contains a systematic return factor and an ambiguity portfolio return factor, where the ambiguity portfolio weights are determined within the model. We test our model empirically and we obtain the model-implied results.
Author: Louis R. Piccotti
Publisher:
ISBN:
Category :
Languages : en
Pages : 61
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Book Description
We derive the equilibrium asset expected returns when there is ambiguity in asset expected returns, as well as ambiguity in asset return variances. In our model, ambiguity risk is systematic in nature and is non-diversifiable. Under regularity conditions, expected asset returns are linearly increasing in variance risk and ambiguity risk. We show that a beta pricing model can be derived from the equilibrium expected return function, which contains a systematic return factor and an ambiguity portfolio return factor, where the ambiguity portfolio weights are determined within the model. We test our model empirically and we obtain the model-implied results.
Author: Nengjiu Ju
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
We propose a novel generalized recursive smooth ambiguity model which allows a three-way separation among risk aversion, ambiguity aversion, and intertemporal substitution. We apply this utility 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 riskfree 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, and the mean reversion of excess returns. The keyintuition 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.
Author: Mohammad R. Jahan-Parvar
Publisher:
ISBN:
Category :
Languages : en
Pages : 47
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Book Description
We examine a production-based asset pricing model with an unobservable mean growth rate ollowing 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 nvestment growth, (iv) countercyclical equity premium and market price of risk, (v) conditional heteroscedasticity in returns, and (vi) long-horizon predictability of excess returns.
Author: Elena Asparouhova
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Author: Hening Liu
Publisher:
ISBN:
Category : Investments
Languages : en
Pages : 84
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Book Description
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Author: Chen Lin
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
Most of resource extraction and pricing models assume that risks are known with certain. However, empirical studies show that implausible high degree of risk diversification is needed to rationalize a Hotelling/Capital-Asset-Pricing model of exhaustible resource. Many choice situations feature Knight uncertainty (i.e., ambiguity or uncertainty about risk) rather than the pure risk. We present an exhaustible resource pricing model with recursive multi-priors utility in continuous-time that demonstrates the effect of ambiguity aversion on resource extraction and pricing. To investigate the pricing problem under various market structures, we discuss not only a competitive market with homogeneous producers, but also a competitive market with heterogeneous producers. Results show that other than the famous Hotelling rule the ambiguity aversion also contributes to the exhaustible resource pricing. This explains the relative high excess return that has been empirically observed in the Hotelling/Capital-Asset-Pricing model of exhaustible resource. In other words, render unto Hotelling that which belongs to Hotelling and render unto Knight, that which belongs to Him.
Author: Álvaro Cartea
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
We consider an optimal execution problem where an agent holds a position in an asset which must be liquidated (using limit orders) before a terminal horizon. Beginning with a standard model for the trading dynamics, we analyse how the acknowledgement of model misspecification affects the agent's optimal trading strategy. The three possible sources of misspecification in this context are: (i) the arrival rate of market orders, (ii) the fill probability of limit orders, and (iii) the dynamics of the asset price. We show that ambiguity aversion with respect to each factor of the model has a similar effect on the optimal strategy, but the magnitude of the effect depends on time and inventory position in different ways depending on the source of uncertainty. In addition we allow the agent to employ market orders to further increase the strategy's profitability and show the effect of ambiguity aversion on the shape of the optimal impulse region. In some cases we have a closed-form expression for the optimal trading strategy which significantly enhances the efficiency in which the strategy can be executed in real time.
Author: Irasema Alonso
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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Book Description
Under the hypothesis that aggregate U.S. consumption is random and, more importantly, viewed as ambiguous by consumers, we examine the implications for asset prices and for how consumption fluctuations influence consumer welfare. First, considering a simple, Mehra-Prescott-style endowment economy with a representative agent facing consumption fluctuations calibrated to match U.S. data, we study to what extent ambiguity aversion can deliver asset prices that are consistent with data: a high return on equity and a low return on riskfree bonds. For some configurations of preference parameters - a discount factor, a degree of relative risk aversion, and a measure of ambiguity aversion - we find that it can. We then use these parameter configurations to investigate how much consumers would be willing to pay to reduce endowment fluctuations to zero, thus delivering a Lucas-style welfare cost of fluctuations. These costs turn out to be very large: consumers can be willing to pay over 10% of consumption in permanent terms.
Author: Lars Peter Hansen
Publisher: Princeton University Press
ISBN: 0691170975
Category : Business & Economics
Languages : en
Pages : 453
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Book Description
The standard theory of decision making under uncertainty advises the decision maker to form a statistical model linking outcomes to decisions and then to choose the optimal distribution of outcomes. This assumes that the decision maker trusts the model completely. But what should a decision maker do if the model cannot be trusted? Lars Hansen and Thomas Sargent, two leading macroeconomists, push the field forward as they set about answering this question. They adapt robust control techniques and apply them to economics. By using this theory to let decision makers acknowledge misspecification in economic modeling, the authors develop applications to a variety of problems in dynamic macroeconomics. Technical, rigorous, and self-contained, this book will be useful for macroeconomists who seek to improve the robustness of decision-making processes.
