Ambiguity Aversion, Bond Pricing and the Non-Robustness of Some Affine Term Structures

56 Pages Posted: 1 Mar 2005

See all articles by Patrick Gagliardini

Patrick Gagliardini

USI Università della Svizzera italiana; Swiss Finance Institute

Paolo Porchia

IE Business School

Fabio Trojani

Swiss Finance Institute; University of Geneva

Date Written: February 2005

Abstract

We develop a continuous time general equilibrium yield curve model under ambiguity aversion. Even a moderate level of 'aggregate ambiguity' affects significantly the term structure and can drive the prices of common interest rate derivatives toward the patterns observed in fixed income markets. Equilibrium term premia and interest rates have rich functional forms, with random factors unpriced under the 'standard' paradigm that pay a premium for ambiguity.

Explicit descriptions of the impact of ambiguity aversion on popular term structure factor models are provided both for cases where ambiguity is time varying and for cases where it is not.

Keywords: General equilibrium, ambiguity, term structure, interest rate derivatives

JEL Classification: D58, D81, E43, G12, G13

Suggested Citation

Gagliardini, Patrick and Porchia, Paolo and Trojani, Fabio, Ambiguity Aversion, Bond Pricing and the Non-Robustness of Some Affine Term Structures (February 2005). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=675941 or http://dx.doi.org/10.2139/ssrn.675941

Patrick Gagliardini

USI Università della Svizzera italiana ( email )

Via Buffi 13
Lugano, TN 6900
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Paolo Porchia (Contact Author)

IE Business School ( email )

Serrano 99
Madrid, 28006
Spain
+34917821706 (Phone)
+34 91 745 47 62 (Fax)

HOME PAGE: http://paolo-porchia.profesores.ie.edu/

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva
Switzerland

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