Measuring Ambiguity Aversion

A. Ronald Gallant, Mohammad Jahan-Parvar, and Hening Liu

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.

Keywords: Ambiguity aversion, Bayesian estimation, Equity premium puzzle, Markov switching

DOI: http://dx.doi.org/10.17016/FEDS.2015.105