Does Smooth Ambiguity Matter for Asset Pricing?

83 Pages Posted: 22 Jan 2018

See all articles by A. Ronald Gallant

A. Ronald Gallant

Pennsylvania State University

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System

Hening Liu

University of Manchester - Alliance Manchester Business School

Date Written: 2018-01

Abstract

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

Gallant, A. Ronald and Jahan-Parvar, Mohammad R. and Liu, Hening, Does Smooth Ambiguity Matter for Asset Pricing? (2018-01). FRB International Finance Discussion Paper No. 1221. Available at SSRN: https://ssrn.com/abstract=3105896 or http://dx.doi.org/10.17016/IFDP.2018.1221

A. Ronald Gallant (Contact Author)

Pennsylvania State University

University Park
State College, PA 16802
United States

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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