Does Smooth Ambiguity Matter for Asset Pricing?
The Review of Financial Studies, Forthcoming
65 Pages Posted: 21 Dec 2017 Last revised: 5 Oct 2018
Date Written: September 28, 2018
We use the Bayesian method introduced by Gallant and McCulloch (2009) to estimate consumption-based asset pricing models featuring smooth ambiguity preferences. We rely on semi-nonparametric estimation of a flexible auxiliary model in our structural estimation. Based on the market and aggregate consumption data, our estimation provides statistical support for asset pricing models with smooth ambiguity. Statistical model comparison shows that models with ambiguity, learning and time-varying volatility are preferred to the long-run risk model. We analyze asset pricing implications of the estimated models.
Keywords: Ambiguity, Bayesian Estimation, Equity Premium, Markov-Switching, Long-Run Risk
JEL Classification: C61, D81, G11, G12
Suggested Citation: Suggested Citation