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A0347
Title: Ambiguity and financial uncertainty in a real Business Cycle Model Authors:  Hening Liu - University of Manchester (United Kingdom) [presenting]
Yuzhao Zhang - Rutgers Business School (United States)
Abstract: Financial uncertainty, measured by the risk-neutral variance, is negatively related to aggregate quantities and the equity valuation, but is positively related to volatilities of quantities. We examine a production-based asset pricing model in which productivity growth follows a Markov process with a time-varying conditional mean and volatility, and the representative agent has ambiguity aversion. When the model is calibrated to unconditional moments of quantities and asset returns, the model can reproduce the relations between the risk-neutral variance and both the level and variation of quantities and returns. The model can generate a sizable variance risk premium.