A Robust General Equilibrium Stochastic Volatility Model with
Recursive Preference Investors

Weidong Xu

Hongyi Li

and

Chongfeng Wu

This paper investigates the implications of model uncertainty for the equity premium in a stochastic volatility model. We consider a general equilibrium setting with one representative agent who has a stochastic differential utility. The results show that the equilibrium equity premium consists of a market risk premium, a stochastic volatility risk premium and an uncertainty aversion premium. Further, the robustness can increase the equilibrium equity premium and drive down the equilibrium risk-free rate.