We study aversion to model ambiguity and misspecification in dynamic portfolio choice. Investors with relative risk aversion gamma 1 fear return persistence, while risk-tolerant investors (0 gamma 1) fear return mean reversion, to confront model misspecification concerns when facing a model...

This paper develops a theory of dynamic pessimism and its impact on asset prices. Notions of time-varying pessimism arise endogenously in our setting as a consequence of agents’ concern for model misspecification. We generalize the robust control approach of Hansen and Sargent (2001) by...

Errors in survey expectations display waves of pessimism and optimism and significant sluggishness. This paper develops a novel theoretical framework of time-varying beliefs capturing these empirical facts. In our model, the dynamic beliefs arise endogenously due to agents’ attitude toward...

This paper develops a theory of dynamic pessimism and its impact on asset prices. Notions of time-varying pessimism arise endogenously in our setting as a consequence of agents' concern for model misspecification. We generalize the robust control approach of Hansen and Sargent (2001) by...

We use a unique database on the ownership stakes of equity mutual fund directors to analyze whether the directors' incentive structure is related to fund performance. We find that the ownership stakes of both independent and non-independent directors play an economically substantial and...

Motivated by extensive evidence that stock-return correlations are stochastic, we analyze whether the risk of correlation changes (affecting diversification benefits) is priced. We propose a direct and intuitive test by comparing option-implied correlations between stock returns (obtained by...

Motivated by extensive evidence that stock-return correlations are stochastic, we analyze whether the risk of correlation changes (affecting diversification benefits) may be priced. We propose a direct and intuitive test by comparing option-implied correlations between stock returns (obtained by...

Prices of equity index put options contain information on the price of systematic downward jump risk. We use a structural jump-diffusion firm value model to assess the level of credit spreads that is generated by option-implied jump risk premia. In our compound option pricing model, an equity...