This internet appendix provides information on summary statistics, the estimation technique, as well as on the simulation study that are not contained in the paper.Section 1 comprises a table with summary statistics of the data used in the paper.Section 2 describes how we estimate the model parameters and conduct tests with GMM. In Section 3, we briefly review the long-run risks model and its solution.We then discuss the conditional expected value, a key feature of the smooth ambiguity model. Afterwards, we extensively discuss the finite sample properties of our estimation technique based on simulated data.
This article estimates and tests the smooth ambiguity model of Klibanoff, Marinacci, and Mukerji based on stock market data. We introduce a novel methodology to estimate the conditional expectation, which characterizes the impact of a decision maker's ambiguity attitude on asset prices. Our point estimates of the ambiguity parameter are between 25 and 60, whereas our risk aversion estimates are considerably lower. The substantial difference indicates that market participants are ambiguity averse. Furthermore, we evaluate if ambiguity aversion helps explaining the cross-section of expected returns. Compared with Epstein and Zin preferences, we find that incorporating ambiguity into the decision model improves the fit to the data while keeping relative risk aversion at more reasonable levels. Supplementary materials for this article are available online.
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