Downside Risks and the Price of Variance Uncertainty

This paper studies the role of generalized disappointment aversion (GDA) in reconciling several asset-pricing puzzles in models of long-run risks. To fully capture the nonlinearities introduced by these preferences, we solve the model globally with projection. This allows us to scrutinize the channels through which GDA unfolds. A key feature of our calibrated model is the significant wedge GDA drives between the physical and the risk-neutral measure. The model captures not only the size of the variance risk premium (VRP), but also the hump-shaped predictability pattern and the prominent role of downside risks for the VRP and its predictive power

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Year of publication:	2019
Authors:	Lorenz, Friedrich
Other Persons:	Schumacher, Malte (contributor)
Publisher:	[2019]: [S.l.] : SSRN
Subject:	Risiko \| Risk \| Theorie \| Theory \| Volatilität \| Volatility \| Varianzanalyse \| Analysis of variance \| Risikoprämie \| Risk premium \| CAPM

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