Evaluation of long-dated assets: The role of parameter uncertainty

Gollier, Christian. “Evaluation of long-dated assets: The role of parameter uncertainty.” Journal of Monetary Economics 84 (2016): 66-83.

Under expected utility, the uncertainty that affects the parameters of the random walk of consumption growth has no effect on the value of short-term claims and makes the term structure of risk-free rates decreasing. The term structure of aggregate risk premia is increasing when the uncertain cumulants of log consumption are independent. We apply these generic results to the case of an uncertain probability of catastrophes, and to the case of an uncertain trend or volatility of growth. Adding some persistence to unobservable shocks into our benchmark model, we show that the term structure of risk premia is hump-shaped.

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