http://staff.science.uva.nl/~spreij/stieltjes/winterschool2003.html Recursive Multiple-Priors Utility (RMPU) represents non-myopic pessimism and has a non-standard implementation that makes the study of the ensuing asset prices challenging. We identify a continuous-time RMPU exchange equilibrium (its label is LCE-RMPU) that is tractable and calibration viable even in the presence of a stochastic opportunity set and incomplete markets. We find that LCE-RMPU affects equity returns only indirectly, whereas it directly affects the conditional riskfree rates. LCE-RMPU equity premia are first-order functions of the consumption growth volatility and reflect the exogenous time variation in the LCE-RMPU pessimism.
Equilibrium Asset Pricing with Time-Varying Pessimism
SBUELZ, Alessandro;
2003-01-01
Abstract
http://staff.science.uva.nl/~spreij/stieltjes/winterschool2003.html Recursive Multiple-Priors Utility (RMPU) represents non-myopic pessimism and has a non-standard implementation that makes the study of the ensuing asset prices challenging. We identify a continuous-time RMPU exchange equilibrium (its label is LCE-RMPU) that is tractable and calibration viable even in the presence of a stochastic opportunity set and incomplete markets. We find that LCE-RMPU affects equity returns only indirectly, whereas it directly affects the conditional riskfree rates. LCE-RMPU equity premia are first-order functions of the consumption growth volatility and reflect the exogenous time variation in the LCE-RMPU pessimism.
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