International Finance Discussion Papers (IFDP)

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January 2018

Does Smooth Ambiguity Matter for Asset Pricing?

A. Ronald Gallant, Mohammad R. Jahan-Parvar, and Hening Liu

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.

Accessible materials (.zip)

Keywords: Ambiguity, Bayesian estimation, equity premium, Markov-switching, long-run risk

DOI: https://doi.org/10.17016/IFDP.2018.1221

PDF: Full Paper

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Last Update: January 09, 2020