Measuring Ambiguity Aversion

Abstract

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.

Information Ambiguity, Market Institutions and Asset Prices: Experimental Evidence

“…Li & Janssen (2018) find that the disposition effect, the reluctance to realize losses and the eagerness to realize gains, can lead investors to underreact to signal realizations about an ambiguous asset. There is a lot of empirical and theoretical research on ambiguity and asset pricing, e.g., Chen & Epstein (2002), Cao et al (2005), Gollier (2011), Illeditsch (2011), Easley et al (2014), Jeong et al (2015), Gallant et al (2015), Bianchi & Tallon (2018), Brenner & Izhakian (2018). Much of this literature argues that ambiguity aversion leads to a higher equity premium in asset markets.…”

Essays on behavioral and experimental finance

“…Third, our paper is related to the literature on ambiguity and the empirical distributional properties of financial market data. There is a lot of empirical and theoretical research on ambiguity and asset pricing, e.g., Chen and Epstein (2002), Cao et al (2005), Gollier (2011), Illeditsch (2011), Jeong et al (2015), Gallant et al (2015), Bianchi et al (2018), Brenner and Izhakian (2018). Much of this literature argues that ambiguity aversion leads to a higher equity premium in asset markets.…”