Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/144827 
Year of Publication: 
2016
Series/Report no.: 
DIW Discussion Papers No. 1602
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
This paper introduces changes in the level of ambiguity as a complementary source of time-varying risk aversion. We show in a consumption-based asset pricing model with simultaneously risky and ambiguous assets that a rise in the level of ambiguity raises investors' risk aversion. The effect is quantified in an application to European sovereign debt markets using a structural VAR to achieve identification in the data. We proxy for ambiguity using a measure of macroeconomic uncertainty and decompose empirically credit default swaps (CDS) for Spain and Italy into three shocks: fundamental default risk, risk aversion, and uncertainty. We find that shocks to uncertainty significantly increase international investors' risk aversion, accounting for about one fifth of its variation at a five week horizon, and have a significant and economically relevant impact on sovereign financing premia.
Subjects: 
Time-varying risk aversion
Ambiguity
Uncertainty
Sovereign debt
Identification via heteroscedasticity
Maxmin
JEL: 
C32
D80
E43
G01
H63
Document Type: 
Working Paper

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