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Ambiguity, Information Quality and Asset Pricing

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Author Info
Larry Epstein () (University of Rochester)
Martin Schneider () (New York University)

Additional information is available for the following registered author(s):

Abstract

When ambiguity averse investors process news of uncertain quality, they act as if they take a worst-case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce negative skewness in asset returns, increase price volatility and induce ambiguity premia that depend on idiosyncratic risk in fundamentals. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change. This helps to explain the reaction of markets to events like 9/11/2001.

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_507.pdf
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Publisher Info
Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 507.

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Length: 33 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:roc:rocher:507

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Postal: UNIVERSITY OF ROCHESTER, CENTER FOR ECONOMIC RESEARCH, DEPARTMENT OF ECONOMICS, HARKNESS 231 ROCHESTER NEW YORK 14627 U.S.A.

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Related research
Keywords: ambiguity information quality asset pricing idiosyncratic risk negatively skewed returns

Other versions of this item:

Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D9 - Microeconomics - - Intertemporal Choice and Growth
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Larry Epstein & Martin Schneider, 2006. "Learning Under Ambiguity," RCER Working Papers 527, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
    Other versions:
  2. Alonso, Irasema & Prado, Jr., Jose Mauricio, 2007. "Ambiguity Aversion, the Equity Premium and the Welfare Costs of Business Cycles," Seminar Papers 752, Stockholm University, Institute for International Economic Studies. [Downloadable!]
  3. David Backus & Bryan Routledge & Stanley Zin, 2004. "Exotic Preferences for Macroeconomists," NBER Working Papers 10597, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Dirk Hackbarth & Jianjun Maio, 2007. "The Dynamics of Mergers and Acquisitions in Oligopolistic Industries," Boston University - Department of Economics - Working Papers Series WP2007-017, Boston University - Department of Economics. [Downloadable!]
    Other versions:
  5. Fabio Trojani & Markus Leippold & Paolo Vanini, 2005. "Learning and Asset Prices under Ambiguous Information," University of St. Gallen Department of Economics working paper series 2005 2005-03, Department of Economics, University of St. Gallen. [Downloadable!]
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