Does ambiguity matter? estimating asset pricing models with multiple-priors recursive utility. Unpublished manuscript, Texas A&M

This paper considers continuous time asset pricing models with stochastic dif-ferential utility incorporating decision makers ’ concern with ambiguity on true probability measure. In order to identify and estimate key parameters in the models, we use a novel econometric methodology developed recently by Park (2008) for the statistical inference on continuous time conditional mean models. The methodology only imposes the condition that the pricing error is a con-tinuous martingale to achieve identification, and obtain consistent estimates, of parameters. Under a representative agent setting, we empirically evaluate alter-native preference specifications including a multiple-prior recursive utility. Our empirical findings are summarized as follows: Relative risk aversion is estimated around 2-5 with ambiguity aversion and 6-14 without ambiguity aversion. Re-lated, the estimated ambiguity aversion is both economically and statistically significant and including the ambiguity aversion clearly lowers relative risk aver-sion. The elasticity of intertemporal substitution (EIS) is higher than 1, around 2-5 with ambiguity aversion, and quite high without ambiguity aversion. The identification of EIS appears to be fairly weak, as observed by many previous authors, though other aspects of our empirical results seem quite robust