{"title":"Uncertainty premia for small and large risks","authors":"Martin Puhl , Pavel Savor , Mungo Wilson","doi":"10.1016/j.jbankfin.2024.107253","DOIUrl":null,"url":null,"abstract":"<div><p>We develop a model showing that the effect of smooth ambiguity aversion on large risks, those that are independent of the holding period, is of first-order importance, in contrast to risks that are proportional to the holding period. To test this hypothesis, we construct an ex-ante measure of the price of uncertainty based on changes in the option-implied concavity of preferences. As predicted by our model, we find that such concavity increases ahead of scheduled macroeconomic announcements, which represent large risks. We also provide an estimate of the coefficient of relative ambiguity aversion and show how uncertainty varies across different announcements. Our results suggest that the macroeconomic announcement premium arises at least partly because of an increase in the price of uncertainty. One implication is that a fundamental benefit of securities markets is that they break large risks into small ones by allowing frequent trading, thereby reducing discount rates.</p></div>","PeriodicalId":48460,"journal":{"name":"Journal of Banking & Finance","volume":"167 ","pages":"Article 107253"},"PeriodicalIF":3.6000,"publicationDate":"2024-06-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Banking & Finance","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0378426624001675","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
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Abstract
We develop a model showing that the effect of smooth ambiguity aversion on large risks, those that are independent of the holding period, is of first-order importance, in contrast to risks that are proportional to the holding period. To test this hypothesis, we construct an ex-ante measure of the price of uncertainty based on changes in the option-implied concavity of preferences. As predicted by our model, we find that such concavity increases ahead of scheduled macroeconomic announcements, which represent large risks. We also provide an estimate of the coefficient of relative ambiguity aversion and show how uncertainty varies across different announcements. Our results suggest that the macroeconomic announcement premium arises at least partly because of an increase in the price of uncertainty. One implication is that a fundamental benefit of securities markets is that they break large risks into small ones by allowing frequent trading, thereby reducing discount rates.
期刊介绍：
The Journal of Banking and Finance (JBF) publishes theoretical and empirical research papers spanning all the major research fields in finance and banking. The aim of the Journal of Banking and Finance is to provide an outlet for the increasing flow of scholarly research concerning financial institutions and the money and capital markets within which they function. The Journal''s emphasis is on theoretical developments and their implementation, empirical, applied, and policy-oriented research in banking and other domestic and international financial institutions and markets. The Journal''s purpose is to improve communications between, and within, the academic and other research communities and policymakers and operational decision makers at financial institutions - private and public, national and international, and their regulators. The Journal is one of the largest Finance journals, with approximately 1500 new submissions per year, mainly in the following areas: Asset Management; Asset Pricing; Banking (Efficiency, Regulation, Risk Management, Solvency); Behavioural Finance; Capital Structure; Corporate Finance; Corporate Governance; Derivative Pricing and Hedging; Distribution Forecasting with Financial Applications; Entrepreneurial Finance; Empirical Finance; Financial Economics; Financial Markets (Alternative, Bonds, Currency, Commodity, Derivatives, Equity, Energy, Real Estate); FinTech; Fund Management; General Equilibrium Models; High-Frequency Trading; Intermediation; International Finance; Hedge Funds; Investments; Liquidity; Market Efficiency; Market Microstructure; Mergers and Acquisitions; Networks; Performance Analysis; Political Risk; Portfolio Optimization; Regulation of Financial Markets and Institutions; Risk Management and Analysis; Systemic Risk; Term Structure Models; Venture Capital.
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