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Ambiguity aversion and the term structure of interest

Gagliardini, Patrick ; Porchia, Paolo ; Trojani, Fabio

In: The review of financial studies, 2009, vol. 22, no. 10, p. 4157-4188

This paper studies the term structure implications of a simple structural model in which the representative agent displays ambiguity aversion, modeled by Multiple Priors Recursive Utility. Bond excess returns reflect a premium for ambiguity, which is observationally distinct from the risk premium of affine yield curve models. The ambiguity premium can be large even in the simplest log-utility...