Ambiguity Learning And Asset Returns
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Author | : Nengjiu Ju |
Publisher | : |
Total Pages | : 35 |
Release | : 2009 |
Genre | : |
ISBN | : |
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 | : Nengjiu Ju |
Publisher | : |
Total Pages | : 47 |
Release | : 2007 |
Genre | : |
ISBN | : |
Author | : Zengjing Chen |
Publisher | : |
Total Pages | : 64 |
Release | : 2000 |
Genre | : Assets (Accounting) |
ISBN | : |
Author | : Louis R. Piccotti |
Publisher | : |
Total Pages | : 61 |
Release | : 2019 |
Genre | : |
ISBN | : |
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 | : Wayne Ferson |
Publisher | : MIT Press |
Total Pages | : 497 |
Release | : 2019-03-12 |
Genre | : Business & Economics |
ISBN | : 0262039370 |
An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.
Author | : Markus Leippold |
Publisher | : |
Total Pages | : |
Release | : 2010 |
Genre | : |
ISBN | : |
In a Lucas exchange economy with standard power utility, we study asset prices under learning and ambiguous information. In contrast with models featuring only learning or ambiguity, our model is successful in matching the equity premium, the interest rate, and the volatility of stock returns under empirically reasonable parameters. Our closed-form formulas also show that a severe downward bias arises in the empirical relation between stock returns and return volatility. We quantify this bias in simulations and show that our model can explain why such a relation is difficult to detect in the data.
Author | : Kim Peijnenburg |
Publisher | : |
Total Pages | : 56 |
Release | : 2016 |
Genre | : |
ISBN | : |
Ambiguity and learning about the equity premium can simultaneously explain the low fraction of financial wealth allocated to stocks over the life cycle and the stock market participation puzzle. Individuals are ambiguous about the size of the equity premium and are averse to this ambiguity, resulting in lower stock allocations over the life cycle consistent with the data. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity leads to underdiversification, home bias, lower Sharpe ratios, and higher savings. Similar results cannot be obtained by assuming higher risk aversion.
Author | : Mohammad R. Jahan-Parvar |
Publisher | : |
Total Pages | : 47 |
Release | : 2014 |
Genre | : |
ISBN | : |
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 | : Larry G. Epstein |
Publisher | : |
Total Pages | : 45 |
Release | : 2002 |
Genre | : Investment analysis |
ISBN | : |
Author | : Leonard C. MacLean |
Publisher | : World Scientific |
Total Pages | : 941 |
Release | : 2013 |
Genre | : Business & Economics |
ISBN | : 9814417351 |
This handbook in two parts covers key topics of the theory of financial decision making. Some of the papers discuss real applications or case studies as well. There are a number of new papers that have never been published before especially in Part II.Part I is concerned with Decision Making Under Uncertainty. This includes subsections on Arbitrage, Utility Theory, Risk Aversion and Static Portfolio Theory, and Stochastic Dominance. Part II is concerned with Dynamic Modeling that is the transition for static decision making to multiperiod decision making. The analysis starts with Risk Measures and then discusses Dynamic Portfolio Theory, Tactical Asset Allocation and Asset-Liability Management Using Utility and Goal Based Consumption-Investment Decision Models.A comprehensive set of problems both computational and review and mind expanding with many unsolved problems are in an accompanying problems book. The handbook plus the book of problems form a very strong set of materials for PhD and Masters courses both as the main or as supplementary text in finance theory, financial decision making and portfolio theory. For researchers, it is a valuable resource being an up to date treatment of topics in the classic books on these topics by Johnathan Ingersoll in 1988, and William Ziemba and Raymond Vickson in 1975 (updated 2 nd edition published in 2006).