Ambiguity Aversion and the Term Structure of Interest Rates
TLDR
This paper studied the term structure implications of a simple structural economy in which the representative agent displays ambiguity aversion, modeled by multiple priors recursive utility, and found no apparent tradeoffs between fitting the first and second moments of the yield curve and the large equity premium.Abstract:
This paper studies the term structure implications of a simple structural economy in which the representative agent displays ambiguity aversion, modeled by Multiple Priors Recursive Utility. Bond excess returns reflect a premium for ambiguity, which is observationally distinct from the risk premium of affine yield curve models. The ambiguity premium can be large even in the simplest logutility model and is non zero also for stochastic factors that have a zero risk premium. A calibrated low-dimensional two-factor economy with ambiguity is able to reproduce the deviations from the expectations hypothesis documented in the literature, without modifying in a substantial way the nonlinear mean reversion dynamics of the short interest rate. In this economy, we do not find any apparent tradeoffs between fitting the first and second moments of the yield curve and the large equity premium.read more
Citations
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Ambiguity and Asset Markets
TL;DR: In this article, the authors review models of ambiguity aversion and show that such models have implications for portfolio choice and asset pricing that are very different from those of SEU and that help to explain otherwise puzzling features of the data.
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Ambiguity in Asset Pricing and Portfolio Choice: A Review of the Literature
TL;DR: This article conducted a survey of the existing literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices, and concluded that the ambiguity literature has led to a number of significant advances in our ability to rationalize empirical features of asset returns and portfolio decisions.
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Learning and Asset Prices Under Ambiguous Information
TL;DR: In this article, the authors propose a new modeling framework to study the asset pricing implications of learning under ambiguity aversion in a continuous time partial information Lucas economy, and characterize analytically equilibrium equity returns.
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Public information arrival: Price discovery and liquidity in electronic limit order markets
TL;DR: In this paper, the impact of newswire messages on intraday price discovery, liquidity, and trading intensity in an electronic limit order market was studied, and it was found that negative news messages are particularly informative and induce stronger market reactions.
Journal ArticleDOI
Ambiguity in asset pricing and portfolio choice: a review of the literature
TL;DR: The authors survey the literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices, leading to a number of significant advances in our ability to rationalize empirical features of asset returns and portfolio decisions.
References
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TL;DR: In this paper, the authors use an intertemporal general equilibrium asset pricing model to study the term structure of interest rates and find that anticipations, risk aversion, investment alternatives, and preferences about the timing of consumption all play a role in determining bond prices.
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