A Robust General Equilibrium Stochastic Volatility Model with Recursive Preference Investors

This paper investigates the implications of model uncertainty for the equity premium in a stochastic volatility model. We consider a general equilibrium setting with one representative agent who has a stochastic differential utility. The results show that the equilibrium equity premium consists of a market risk premium, a stochastic volatility risk premium and an uncertainty aversion premium. Further, the robustness can increase the equilibrium equity premium and drive down the equilibrium risk-free rate.

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Year of publication:	2011
Authors:	Xu, Weidong ; Li, Hongyi ; Wu, Chongfeng
Published in:	Annals of Economics and Finance. - China Economics and Management Academy, ISSN 1529-7373. - Vol. 12.2011, 2, 2, p. 217-231
Publisher:	China Economics and Management Academy
Subject:	General equilibrium \| Robust control \| Stochastic volatility model \| Equity premium

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Extent:	application/pdf
Type of publication:	Article
Language:	English
Classification:	C61 - Optimization Techniques; Programming Models; Dynamic Analysis ; D51 - Exchange and Production Economies ; D81 - Criteria for Decision-Making under Risk and Uncertainty
Source:	RePEc - Research Papers in Economics

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