CFE 2015: Start Registration
View Submission - CFE
A0409
Title: Long-run risk is the worst-case scenario Authors:  Rhys Bidder - Federal Reserve Bank of San Francisco (United States) [presenting]
Ian Dew-Becker - Kellogg School of Management - Northwestern University (United States)
Abstract: The aim is to study an investor who is unsure of the dynamics of the economy. Not only there are parameters unknown, but the investor does not even know what order model to estimate. She estimates her consumption process non-parametrically and prices assets using a pessimistic model that minimizes lifetime utility subject to a constraint on statistical plausibility. The equilibrium is exactly solvable and we show that the pricing model always includes long-run risks. With risk aversion of $4.8$, the model matches major facts about asset prices, consumption, and investor expectations. A novel link between ambiguity aversion and non-parametric estimation is provided.