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Ambiguity, Information Quality and Asset Pricing Author info | Abstract | Publisher info | Download info | Related research | Statistics Larry Epstein () (University of Rochester )
Martin Schneider () (New York University)
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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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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 2004Date of revision:
Handle: RePEc:roc:rocher:507Contact details of provider: Postal: UNIVERSITY OF ROCHESTER, CENTER FOR ECONOMIC RESEARCH, DEPARTMENT OF ECONOMICS, HARKNESS 231 ROCHESTER NEW YORK 14627 U.S.A.
For technical questions regarding this item, or to correct its listing, contact: (Terry Fisher).
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 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.)
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