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Asset Pricing Models With Heterogeneous Agents

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Hyatt Regency Chicago, Dusable
Hosted By: Econometric Society
  • Chair: Jaroslav Borovicka, New York University

Identifying Ambiguity Shocks in Business Cycle Models Using Survey Data

Jaroslav Borovicka
,
New York University
Anmol Bhandari
,
University of Minnesota
Paul Ho
,
Princeton University

Abstract

We develop a framework to analyze economies with agents facing time-varying concerns for model misspecification. These concerns lead agents to interpret economic outcomes and make decisions through the lens of a pessimistically biased 'worst-case' model. We combine survey data and implied theoretical restrictions on the relative magnitudes and comovement of forecast biases across macroeconomic variables to identify ambiguity shocks as exogenous fluctuations in the worst-case model. Our solution method delivers tractable linear approximations that preserve the effects of time-varying ambiguity concerns and permit estimation using standard Bayesian techniques. Applying our framework to an estimated New-Keynesian business cycle model with frictional labor markets, we find that ambiguity shocks explain a substantial portion of the variation in labor market quantities.

Asset Pricing With Heterogeneous Agents and Long-Run Risk

Ole Wilms
,
University of Zurich
Walt Pohl
,
University of Zurich
Karl Schmedders
,
University of Zurich

Abstract

This paper examines the effect of agent belief heterogeneity on long-run risk models.
We find that for the long-run risk explanation to adequately explain the equity premium,
it is not sufficient for long-run risk to merely exist: agents must all agree that it exists.
Agents who believe in a lower persistence level come to dominate the economy rather
quickly, even if their belief is wrong. This drives the equity premium down below the
level observed in the data.

Optimists, Pessimists, and the Stock Market: The Role of Preferences and Market (In)Completeness

Nicole Branger
,
University of Muenster
Patrick Konermann
,
BI Norwegian Business School
Christian Schlag
,
Goethe University Frankfurt

Abstract

We show that a sizable equity premium is compatible with risk sharing between an optimistic and a pessimistic Epstein-Zin investor in a model featuring jumps in expected consumption growth. Our model generates a positive correlation between return volatility and trading volume as in the data. It reproduces the stylized facts of a positive link between disagreement and expected returns, volatilities, and trading volume. We analyze the impact of preferences, fundamental dynamics, and market incompleteness in detail and highlight their respective importance for our results.
Discussant(s)
Ole Wilms
,
University of Zurich
Jaroslav Borovicka
,
New York University
Nicole Branger
,
University of Muenster
Alexis Akira Toda
,
University of California-San Diego
JEL Classifications
  • G0 - General