We propose a novel one-sector stochastic growth model, where producitivity growth follows a Markov-switching process with two regimes, and where households have generalized recursive smooth ambiguity preferences. The adopted class of preferences permits a three-way separation of risk aversion,...

Realized divergence gauges the distinct realized moments associated with time-varying uncertainty and is tradeable with divergence swaps engineered from delta-hedged option portfolios. Consistently with established notions of symmetry in arbitrage-free option markets, implied divergence...

Estimates of agents' risk aversion differ between market studies and experimental studies. We demonstrate that the estimates can be reconciled through consistent treatment of agents' tendency for narrow framing, regarding integration of background wealth as well as across risky outcomes: Risk...

In 1995, Benartzi and Thaler introduced the concept myopic loss aversion to explain the equity premium puzzle. They provided empirical evidence to support their arguments. Recently, Durand, et al. criticized this empirical analysis. They propose an approach which not only rejects the...

We examine a production-based asset pricing model with an unobservable mean growth rate ollowing a two-state Markov chain and with an ambiguity averse representative agent. Our model requires a low coefficient of relative risk aversion to produce: (i) a high equity premium and volatile equity...

Maximum drawdown refers to the largest cumulative loss of a portfolio within a given time interval. While it has been used by investment professionals as an important measure of portfolio risk for many years, its nature and its implications for asset pricing have not been well understood. The...

These days it's become convention (reinforced by the media's treatment of wealth) to assess our net worth by tallying up the market value of our financial assets, even though it's more natural and useful to think of our wealth as a stream of dollars over time given the nature of our income and...

The longest bull market in US stock market history is over. Uncertainty over the public health and economic impact of the coronavirus pandemic will keep markets extremely volatile, making it likely we'll touch a wide range of price levels in the months ahead. Amidst such uncertainty, it's a...

We introduce the notion of a patience premium, which is based on the concept of ambiguity aversion and is an ambiguity premium. We identify three reasons for the existence of the patience premium: Certainty preferences: perceived confidence in the expected performance; Comparison with peers:...

The term “equity premium puzzle” was coined in 1985 by economists Rajnish Mehra and Edward C. Prescott. The equity premium puzzle in considered one of the most significant questions in finance. A number of papers have explored the fundamental questions of why the premium exists and has not...