Does Ambiguity Matter? Estimating Asset Pricing Models with a Multiple-Priors Recursive Utility

This paper considers asset pricing models with stochastic differential utility incorporating decision makers' concern with ambiguity on true probability measure. Under a representative agent setting, we empirically evaluate alternative preference specifications including a multiple-priors recursive utility. Our empirical findings are summarized as follows: Relative risk aversion is estimated around 1-8 with ambiguity aversion and 7.4-15 without ambiguity aversion. Estimated ambiguity aversion is both economically and statistically significant and can explain up to 45% of the average equity premium. The elasticity of intertemporal substitution is higher than 1 but its identification appears to be weak, as observed by previous authors.