Working Papers

    - Winner of the 2017 Young Economist of the Year Award, Czech Economic Society
    - Winner of the 2017 Best Paper in Theoretical Economics, Czech Econometric Society

This paper provides a generalized disappointment aversion (GDA) interpretation of the variance and skew risk premia in equity returns and the volatility skew in index option prices. The key ingredients are Bayesian learning about the consumption growth rate and the investor's tail aversion induced by GDA preferences which amplify the impact of consumption shocks. This model with disappointment risk reproduces salient properties of the variance and skew risk premia and generates a realistic volatility skew implied by index options, while simultaneously matching the mean and volatility of risk-free rate and equity returns, and the level of the price-dividend ratio.

We examine how parameter learning amplifies the impact of macroeconomic shocks on equity prices and quantities in a standard production economy where a representative agent has Epstein-Zin preferences. An investor observes technology shocks which follow a regime-switching process but does not know the underlying model parameters governing the short-term and long-run perspectives of economic growth. We show that rational parameter learning endogenously generates long-run productivity and consumption risks that help explain a wide array of dynamic pricing phenomena. The asset pricing implications of subjective long-run risks crucially depend on the introduction of a procyclical dividend process consistent with the data. 

Work in Progress

Learning, Hidden Growth Persistence and Option Prices | Draft available on request

I construct a standard consumption-based asset pricing model that captures salient features of the index option prices, equity returns, and risk-free rate. A representative agent faces ex-ante uncertainty about two hidden types of economic recessions: a brief business slowdown and a lost decade. A calibration of the model with empirically consistent fundamentals shows that learning about a sojourn time of recessions explains the index option prices in addition to matching unconditional moments of equity returns and generating a variety of dynamic pricing phenomena in the equity market.  Intuitively, a representative investor is willing to pay a large premium for the index options since they hedge his concerns about the duration of recessions.

Option Prices in a Model with Uncertain Growth

International Asset Pricing with Learning