Ambiguity in the Cross-Section of Expected Returns: An Empirical Assessment

Posted: 31 Jan 2013 Last revised: 24 Nov 2017

See all articles by Julian Thimme

Julian Thimme

Karlsruhe Institute of Technology

Clemens Völkert

University of Muenster - Finance Center Muenster

Date Written: September 9, 2012

Abstract

This paper estimates and tests the smooth ambiguity model of Klibanoff, Marinacci, and Mukerji (2005, 2009) based on stock market data. We introduce a novel methodology to estimate the conditional expectation which characterizes the impact of a decision maker's ambiguity attitude on asset prices. Our point estimates of the ambiguity parameter are between 25 and 40, whereas our risk aversion estimates are considerably lower. The substantial difference indicates that market participants are ambiguity averse. Furthermore, we evaluate if ambiguity aversion helps explaining the cross-section of expected returns. Compared with Epstein and Zin (1989) preferences, we find that incorporating ambiguity into the decision model improves the fit to the data while keeping relative risk aversion at more reasonable levels.

Keywords: ambiguity aversion, asset pricing, cross-section of returns

JEL Classification: C52, D81, E21, E44, G12

Suggested Citation

Thimme, Julian and Völkert, Clemens, Ambiguity in the Cross-Section of Expected Returns: An Empirical Assessment (September 9, 2012). Journal of Business and Economic Statistics 33 (3), 418-429, 2015. Available at SSRN: https://ssrn.com/abstract=2144673 or http://dx.doi.org/10.2139/ssrn.2144673

Julian Thimme

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

HOME PAGE: http://julianthimme.de

Clemens Völkert (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitätsstr. 14-16
Münster, 48143
Germany

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