Uncertain growth, ambiguity aversion and asset prices

Arbeitspapier

I develop a stochastic growth model with production where there is a hidden state governing productivity growth regimes, and the hidden state evolves according to a Markov chain. Economic agents learn about the hidden state and display ambiguity aversion in the spirit of Klibanoff et al. (2005). I calibrate the model to the post-war US data. The main findings are (1) the model can generate a high and volatile equity premium while a low and smooth risk-free rate, (2) agents' fluctuating beliefs induce countercylical variation in equity premium and in the expected volatility of returns, and moreover volatility clusterng and persistence; and (3) Bayesian learning itself is unable to generate a significant and positive risk premium once time variation in investment opportunities is accounted for; in most cases, Bayesian learning lowers the unconditional mean of equity premium.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Manchester Business School Working Paper ; No. 620

Classification and Topics

• Classification: Wirtschaft ; Optimization Techniques; Programming Models; Dynamic Analysis ; Criteria for Decision-Making under Risk and Uncertainty ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Countercylical ; Equity premium ; Markov switching ; Smooth ambiguity ; Stochastic growth

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Liu, Hening
• Event: Veröffentlichung
• (who): The University of Manchester, Manchester Business School
• (where): Manchester
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/102369
• Last update: 10.03.2025, 11:45 AM CET