Measuring Ambiguity Aversion

48 Pages Posted: 25 Nov 2015

See all articles by A. Ronald Gallant

A. Ronald Gallant

Duke University; New York University (NYU)

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System

Hening Liu

University of Manchester - Alliance Manchester Business School

Date Written: 2015-11-23

Abstract

We confront the generalized recursive smooth ambiguity aversion preferences of Klibanoff, Marinacci, and Mukerji (2005, 2009) with data using Bayesian methods introduced by Gallant and McCulloch (2009) to close two existing gaps in the literature. First, we use macroeconomic and financial data to estimate the size of ambiguity aversion as well as other structural parameters in a representative-agent consumption-based asset pricing model. Second, we use estimated structural parameters to investigate asset pricing implications of ambiguity aversion. Our structural parameter estimates are comparable with those from existing calibration studies, demonstrate sensitivity to sampling frequencies, and suggest ample scope for ambiguity aversion.

Keywords: Ambiguity aversion, Bayesian estimation, Equity premium puzzle, Markov switching

JEL Classification: C61, D81, G11, G12

Suggested Citation

Gallant, A. Ronald and Jahan-Parvar, Mohammad R. and Liu, Hening, Measuring Ambiguity Aversion (2015-11-23). FEDS Working Paper No. 2015-105. Available at SSRN: https://ssrn.com/abstract=2694888 or http://dx.doi.org/10.17016/FEDS.2015.105

A. Ronald Gallant (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

New York University (NYU)

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
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Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/mrjahan/

Hening Liu

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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