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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 ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change. Copyright 2008 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2008.01314.x
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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 63 (2008)
Issue (Month): 1 (02)
Pages: 197-228

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Handle: RePEc:bla:jfinan:v:63:y:2008:i:1:p:197-228

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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

References

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