Ambiguity in the Cross-Section of Expected Returns: An Empirical Assessment

Thimme, Julian; Völkert, Clemens

doi:10.2139/ssrn.2144673

Cited by 9 publications

(12 citation statements)

References 12 publications

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“…Thimme and Völkert () construct a proxy that contains human capital from the variable

c a y

as introduced by Lettau and Ludvigson () and show that it is much less volatile than the return on a stock market index. The authors assume that human capital is proportional to labor income, an assumption which is rather established in the literature (see, e.g., Jagannathan and Wang ()), although criticized by Lustig et al .…”

Section: Consumers' Preferences and The Eismentioning

confidence: 99%

“…Instead of considering the return on wealth

R_{w, t + 1}

in the Euler equation, another idea is to use aggregate wealth

W_{t}

directly, or the consumption‐to‐wealth ratio

C_{t} / W_{t}

which is assumed to be stationary. While Thimme and Völkert () use a proxy of the ratio to come up with a return proxy, Campbell () suggests a more direct approach. Following Campbell and Shiller (), the consumer's budget constraint

W_{t + 1} = R_{w, t + 1} false(W_{t} - C_{t} false)

can be solved for

R_{w, t + 1}

and log‐linearized, which gives the approximate identity

\begin{matrix} true \\ right r_{w, t + 1} = κ_{0} - κ_{1} (c_{t + 1} - w_{t + 1}) + (c_{t} - w_{t}) + normalΔ c_{t + 1} \end{matrix}

with log consumption‐to‐wealth ratio

c - w

and constants κ 0 and κ 1 , where κ 1 is the steady state of

false(W_{t} - C_{t} false) / W_{t}

.…”

Section: Consumers' Preferences and The Eismentioning

confidence: 99%

“…For the identity to hold, one should use a consistent definition of the return on wealth, that is one that includes the return on human capital. Using a consistent measure, such as the one considered by Thimme and Völkert (), would however make the analysis redundant.…”

Section: Consumers' Preferences and The Eismentioning

confidence: 99%

See 2 more Smart Citations

Intertemporal Substitution in Consumption: A Literature Review

Thimme

2016

Journal of Economic Surveys

Self Cite

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Abstract. This paper reviews the status quo of the empirical literature about the elasticity of intertemporal substitution (EIS) in consumption. Aiming to answer the question what the true magnitude of the parameter really is, it discusses several recent advances of the theory and highlights challenges for the estimation. Although the general discussion still seems to be prevailed by Hall's early EIS estimates close to zero, we show that several deviations from the time-additive constant relative risk aversion model speak in favor of considerably higher values. Our treatment is supposed to provide researchers a hint at which parameter is a reasonable and incontrovertible choice for the calibration of models in macroeconomics and finance.

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“…Thimme and Völkert () construct a proxy that contains human capital from the variable

c a y

Section: Consumers' Preferences and The Eismentioning

confidence: 99%

“…Instead of considering the return on wealth

R_{w, t + 1}

in the Euler equation, another idea is to use aggregate wealth

W_{t}

directly, or the consumption‐to‐wealth ratio

C_{t} / W_{t}

W_{t + 1} = R_{w, t + 1} false(W_{t} - C_{t} false)

can be solved for

R_{w, t + 1}

and log‐linearized, which gives the approximate identity

\begin{matrix} true \\ right r_{w, t + 1} = κ_{0} - κ_{1} (c_{t + 1} - w_{t + 1}) + (c_{t} - w_{t}) + normalΔ c_{t + 1} \end{matrix}

with log consumption‐to‐wealth ratio

c - w

and constants κ 0 and κ 1 , where κ 1 is the steady state of

false(W_{t} - C_{t} false) / W_{t}

.…”

Section: Consumers' Preferences and The Eismentioning

confidence: 99%

See 1 more Smart Citation

Intertemporal Substitution in Consumption: A Literature Review

Thimme

2016

Journal of Economic Surveys

Self Cite

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show abstract

“…Empirical studies on reduced-form estimation of models with ambiguity aversion include Anderson, Ghysels, and Juergens (2009), Viale, Garcia-Feijoo, and Giannetti (2014), and Thimme and Völkert (2015). These papers show that ambiguity aversion is priced in the cross-section of expected returns.…”

Section: Introductionmentioning

confidence: 99%

“…Fixing the IES at the calibrated value, Thimme and Völkert (2015) use the generalized method of moments (GMM) to estimate the ambiguity aversion parameter. Both Viale, Garcia-Feijoo, and Giannetti (2014) and Thimme and Völkert (2015) formulate the stochastic discount factor (SDF) under ambiguity using reduced-form regression methods. Ahn, Choi, Gale, and Kariv (2014) use experimental data to estimate ambiguity aversion in static portfolio choice settings.…”

Section: Introductionmentioning

confidence: 99%

Measuring Ambiguity Aversion

Gallant

2015

FEDS

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We confront the generalized recursive smooth ambiguity aversion preferences of Klibanoff, Marinacci, and Mukerji (2005, 2009) with data using Bayesian methods introduced by Gallant and McCulloch (2009) to close two existing gaps in the literature. First, we use macroeconomic and financial data to estimate the size of ambiguity aversion as well as other structural parameters in a representative-agent consumption-based asset pricing model. Second, we use estimated structural parameters to investigate asset pricing implications of ambiguity aversion. Our structural parameter estimates are comparable with those from existing calibration studies, demonstrate sensitivity to sampling frequencies, and suggest ample scope for ambiguity aversion.

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A volatility smile-based uncertainty index

Vicente

Marins

2021

Ann Finance

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We propose a new uncertainty index based on the discrepancy of the smile of FX options. We show that our index spikes near turbulent periods, forecasts economic activity and its innovations hold a significant and negative equity premium. Unlike other uncertainty indexes, our index is supported by equilibrium models, which relate the difference of options prices across moneyness to uncertainty. Moreover, our index is based on investment decisions, can be easily and continuously updated and is comparable across countries.

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Ambiguity in the Cross-Section of Expected Returns: An Empirical Assessment

Cited by 9 publications

References 12 publications

Intertemporal Substitution in Consumption: A Literature Review

Intertemporal Substitution in Consumption: A Literature Review

Measuring Ambiguity Aversion

A volatility smile-based uncertainty index

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