Asset Pricing with Uncertainty about the Long-Run
When investors have preferences for early resolution of uncertainty, uncertainty about future growth rates affects agents marginal utility, which generates a premium for bearing uncertainty risk. If expected growth rates have persistent long-run dynamics, small local uncertainty about the growth rate can translate into large uncertainty about future cash flows, which amplify the uncertainty premium. We study these effects quantitatively in an endowment economy, where agents learn about consumption growth through a nonlinear filter. We show that high persistence in the expected growth rate of consumption generates a large uncertainty premium, which varies over time, and tends to rise significantly following negative consumption shocks. Moreover, a decrease in consumption volatility can sometimes sharply raise the Sharpe Ratio and risk premium. The model provides a theoretical foundation for volatility risk premium.
Hui Chen Michal Pakos
MIT Sloan School of Management,50 Memorial Drive E52-447,Cambridge,MA 02142 Tepper School of Business,Carnegie Mellon University,Pittsburgh PA
国际会议
大连
英文
1-36
2008-07-02（万方平台首次上网日期，不代表论文的发表时间）