Date: November 12th, Thurs. 17:15-18:45
Speaker: Mr Masataka Suzuki
Affiliation: Hitotsubashi University
Title: Variance Premium and Smooth Ambiguity Preferences with Jump-Diffusion Process
This study examines the effect of smooth ambiguity preferences on asset prices in a continuous-time setting. Applying a jump-diffusion model to the aggregate consumption process, we consider ambiguity about both Poisson jump process and Brownian motion. With reasonable values of preferences parameters, our model replicates historical moments of the U.S. asset returns including equity premium, equity volatility, risk-free rate, and variance premium. In our model, ambiguity aversion is a key factor to generate large equity premium with low level of risk-free rate. Our model also shows that the existence of Poisson jump ambiguity is essential to explain large variance premium in a continuous-time asset pricing model. In addition, our model captures the counter-cyclical pattern and the return predictive power of the variance premium.