Results 1  10
of
22
Ambiguity, Learning, and Asset Returns
, 2007
"... We develop a consumptionbased assetpricing model in which the representative agent is ambiguous about the hidden state in consumption growth. He learns about the hidden state under ambiguity by observing past consumption data. His preferences are represented by the smooth ambiguity model axiomatiz ..."
Abstract

Cited by 18 (1 self)
 Add to MetaCart
We develop a consumptionbased assetpricing model in which the representative agent is ambiguous about the hidden state in consumption growth. He learns about the hidden state under ambiguity by observing past consumption data. His preferences are represented by the smooth ambiguity model axiomatized by Klibanoff et al. (2005, 2006). Unlike the standard Bayesian theory, this utility model implies that the posterior of the hidden state and the conditional distribution of the consumption process given a state cannot be reduced to a predictive distribution. By calibrating the ambiguity aversion parameter, the subjective discount factor, and the risk aversion parameter (with the latter two values between zero and one), our model can match the first moments of the equity premium and riskfree rate found in the data. In addition, our model can generate a variety of dynamic asset pricing phenomena, including the procyclical variation of pricedividend ratios, the countercyclical variation of equity premia and equity volatility, and the mean reversion and long horizon predictability of excess returns.
Intertemporal Substitution and Recursive Smooth Ambiguity Preferences
, 2010
"... In this paper, we establish an axiomatically founded generalized recursive smooth ambiguity model that allows for a separation among intertemporal substitution, risk aversion, and ambiguity aversion. We axiomatize this model using two approaches: the secondorder act approach à la Klibanoff, Marinac ..."
Abstract

Cited by 14 (3 self)
 Add to MetaCart
In this paper, we establish an axiomatically founded generalized recursive smooth ambiguity model that allows for a separation among intertemporal substitution, risk aversion, and ambiguity aversion. We axiomatize this model using two approaches: the secondorder act approach à la Klibanoff, Marinacci, and Mukerji (2005) and the twostage randomization approach à la Seo (2009). We characterize risk attitude and ambiguity attitude within these two approaches. We then discuss our model’s application in asset pricing. Our recursive preference model nests some popular models in the literature as special cases.
Temporal Resolution of Uncertainty and Recursive Models of Ambiguity Aversion, working paper
, 2009
"... Models of ambiguity aversion have recently found many applications in dynamic settings. This paper shows that the modeling choices that are being made in the domain of ambiguity aversion influence the set of modeling choices available in the domain of timing attitudes, in particular the preferences ..."
Abstract

Cited by 9 (0 self)
 Add to MetaCart
Models of ambiguity aversion have recently found many applications in dynamic settings. This paper shows that the modeling choices that are being made in the domain of ambiguity aversion influence the set of modeling choices available in the domain of timing attitudes, in particular the preferences for the timing of the resolution of uncertainty, as defined by the classic work of Kreps and Porteus (1978). The main result of the paper is that the only model of ambiguity aversion that exhibits indifference to timing is the maxmin expected utility of Gilboa and Schmeidler (1989). This paper also examines the structure of the timing nonindifference implied by the other commonly used models of ambiguity aversion. The interdependence of ambiguity and timing that this paper identifies is of interest both conceptually and practically—especially for economists using these models in applications. This paper is a revised and extended version of Chapters 7 and 8 of my dissertation at Northwestern University; some of the results were also reported in my job market paper. Part of this research was done while I was visiting the Economic Theory Center at Princeton University to which I’m very grateful for its support and hospitality. I would like to thank Roland Benabou, Eddie
2010): “Alpha as Ambiguity: Robust MeanVariance Portfolio Analysis,” Discussion paper
"... We derive the analogue of the classic ArrowPratt approximation of the certainty equivalent under model uncertainty as described by the smooth model of decision making under ambiguity of Klibano¤, Marinacci and Mukerji (2005). We study its scope by deriving a tractable meanvariance model adjusted fo ..."
Abstract

Cited by 8 (1 self)
 Add to MetaCart
We derive the analogue of the classic ArrowPratt approximation of the certainty equivalent under model uncertainty as described by the smooth model of decision making under ambiguity of Klibano¤, Marinacci and Mukerji (2005). We study its scope by deriving a tractable meanvariance model adjusted for ambiguity and solving the corresponding portfolio allocation problem. In the problem with a riskfree asset, a risky asset, and an ambiguous asset, we …nd that portfolio rebalancing in response to higher ambiguity aversion only depends on the ambiguous asset’s alpha, setting the performance of the risky asset as benchmark. In particular, a positive alpha corresponds to a long position in the ambiguous asset, a negative alpha corresponds to a short position in the ambiguous asset, and greater ambiguity aversion reduces optimal exposure to ambiguity. The analytical tractability of the enhanced ArrowPratt approximation renders our model especially well suited for calibration exercises aimed at exploring the consequences of model uncertainty on equilibrium asset prices. “Crises feed uncertainty. And uncertainty a¤ects behaviour, which feeds the crisis.”
What is the Chance that the Equity Premium Varies over Time? Evidence from Predictive Regressions, Unpublished Manuscript
, 2007
"... are grateful for financial support from the Aronson+Johnson+Ortiz fellowship through the Rodney L. White Center for Financial Research. This manuscript does not reflect the views of the Board of Governors of the Federal Reserve System. What is the Chance that the Equity Premium Varies over Time? Evi ..."
Abstract

Cited by 5 (1 self)
 Add to MetaCart
are grateful for financial support from the Aronson+Johnson+Ortiz fellowship through the Rodney L. White Center for Financial Research. This manuscript does not reflect the views of the Board of Governors of the Federal Reserve System. What is the Chance that the Equity Premium Varies over Time? Evidence from Predictive Regressions We examine the evidence on excess stock return predictability in a Bayesian setting in which the investor faces uncertainty about both the existence and strength of predictability. When we apply our methods to the dividendprice ratio, we find that even investors who are quite skeptical about the existence of predictability sharply modify their views in favor of predictability when confronted by the historical time series of returns and predictor variables. Correctly taking into account the stochastic properties of the regressor has a dramatic impact on inference, particularly over the 20002005 period. 2 1
A Paradox for the “Smooth Ambiguity”model of Preference," Econometrica 78
, 2010
"... Three Ellsbergstyle thought experiments are described that reect on the smooth ambiguity decision model developed by Klibano¤, Marinacci and Mukerji (2005). The rst experiment poses di ¢ culties for the models axiomatic foundations and, as a result, also for its interpretation, particularly for the ..."
Abstract

Cited by 5 (0 self)
 Add to MetaCart
(Show Context)
Three Ellsbergstyle thought experiments are described that reect on the smooth ambiguity decision model developed by Klibano¤, Marinacci and Mukerji (2005). The rst experiment poses di ¢ culties for the models axiomatic foundations and, as a result, also for its interpretation, particularly for the authorsclaim that the model achieves a separation between ambiguity and the attitude towards ambiguity. Given the problematic nature of its foundations, the behavioral content of the model, and how it di¤ers from multiplepriors, for example, are not clear. The other two thought experiments cast some light on these questions.
On the Smooth Ambiguity Model: A Reply
, 2009
"... Epstein (2009) describes three Ellsbergstyle thought experiments and argues that they pose di ¢ culties for the smooth ambiguity model of decision making under uncertainty developed by Klibano¤, Marinacci and Mukerji (2005). We revisit these thought experiments and …nd, to the contrary, that they e ..."
Abstract

Cited by 3 (0 self)
 Add to MetaCart
Epstein (2009) describes three Ellsbergstyle thought experiments and argues that they pose di ¢ culties for the smooth ambiguity model of decision making under uncertainty developed by Klibano¤, Marinacci and Mukerji (2005). We revisit these thought experiments and …nd, to the contrary, that they either point to strengths of the smooth ambiguity model compared to other models, such as the maxmin expected utility model (Gilboa and Schmeidler, 1989), or, in the case of one thought experiment, raise criticisms that apply equally to a broad range of current ambiguity models. 1
Asset Allocation
 Annual Reviews of Financial Economics
, 2010
"... This review article describes recent literature on asset allocation, covering both static and dynamic models. The article focuses on the bond–stock decision and on the implications of return predictability. In the static setting, investors are assumed to be Bayesian, and the role of various prior be ..."
Abstract

Cited by 3 (1 self)
 Add to MetaCart
This review article describes recent literature on asset allocation, covering both static and dynamic models. The article focuses on the bond–stock decision and on the implications of return predictability. In the static setting, investors are assumed to be Bayesian, and the role of various prior beliefs and specifications of the likelihood are explored. In the dynamic setting, recursive utility is assumed, and attention is paid to obtaining analytical results when possible. Results under both full and limitedinformation assumptions are discussed.
Ambiguity and the historical equity premium
, 2011
"... This paper assesses the quantitative impact of ambiguity on the historically observed equity premium. We consider a Lucastree pure–exchange economy with a single agent where we introduce two key nonstandard assumptions. First, the agent’s beliefs about the dividend/consumption process is ambiguous, ..."
Abstract

Cited by 3 (1 self)
 Add to MetaCart
This paper assesses the quantitative impact of ambiguity on the historically observed equity premium. We consider a Lucastree pure–exchange economy with a single agent where we introduce two key nonstandard assumptions. First, the agent’s beliefs about the dividend/consumption process is ambiguous, i.e., she is uncertain about the exact probability distribution governing the realization of future dividends and consumption. Second, the agent’s preferences are sensitive to this ambiguity, a property formalized using the smooth ambiguity model. The consumption and dividend process is assumed to evolve according to a hidden state model, popularized by Bansal and Yaron (2004), where a persistent latent state variable describes temporary shocks to the mean of consumption growth prospects. We further extend the model to allow for uncertainty about the magnitude of the persistence of the latent state. The agent’s beliefs are ambiguous due to the uncertainty about the conditional mean of the probability distribution on consumption and dividends in the next period. We show that in this model ambiguity is endogenously dynamic, for example, increasing during recessions. This results in an endogenously volatile and (counter)cyclical equity premium. We calibrate the level of ambiguity aversion to match only the first moment of the riskfree rate in data, and ambiguity to match the uncertainty conditional on the historical growth path, and evaluate the