Does Ambiguity about Volatility Matter Empirically?

57 Pages Posted: 11 Dec 2014 Last revised: 10 Oct 2016

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Julian Thimme

Karlsruhe Institute of Technology

Date Written: October 7, 2016

Abstract

It does. Depending on the forecast horizon, a one standard deviation increase in our measure for ambiguity about consumption volatility predicts a significant increase in average excess equity returns varying between 200 and 600 basis points annualized. The ambiguity measure we propose is easily obtained from the cross-section of analysts' forecasts for aggregate output growth. We estimate a version of the long-run risk model, where the investor is concerned about a potential misspecification of the variance dynamics. The measures we construct from survey data can be interpreted as proxies of the usually latent state variables in the model, so that we can perform the estimation without the use of asset pricing information. The model produces unconditional moments and return predictability patterns via the variance premium in line with the data.

Keywords: Ambiguity, ambiguous volatility, asset pricing, long-run risks

JEL Classification: G12, E44, D81

Suggested Citation

Branger, Nicole and Schlag, Christian and Thimme, Julian, Does Ambiguity about Volatility Matter Empirically? (October 7, 2016). Available at SSRN: https://ssrn.com/abstract=2536345 or http://dx.doi.org/10.2139/ssrn.2536345

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

Julian Thimme (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

HOME PAGE: http://julianthimme.de

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