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The impact of ambiguity-loving attitude on market participation and asset pricing

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Listed:
  • Sun, Yuzhe
  • Wang, Yanjie
  • Zhang, Shunming
  • Huang, Helen

Abstract

Ambiguity-averse attitudes are widely accepted to influence investors’ behavior; however, the impact of ambiguity-loving attitudes has yet to be thoroughly investigated. This paper examines the effect of the ambiguity-loving attitude on market participation and asset pricing. We propose a model incorporating investors with an ambiguity-loving attitude, determining that ambiguity-loving individuals have higher allocations in risky assets, crowding out other investors and extending their nonparticipation region. When the market supply is small, ambiguity-loving investors’ discontinuous and non-unique demand mapping can cause “flat ranges” in equilibrium prices. When the market supply is moderate or large, increasing the ambiguity level or ambiguity-loving investors’ fraction reduces equity premium. With short-sales constraints, the effect of ambiguity-loving investors’ attitudes remains unchanged except for their positions and the equity premium. With heterogeneous opinions, a rising ambiguity level or ambiguity-loving investors’ fraction increases equity premiums when they only hold short positions.

Suggested Citation

  • Sun, Yuzhe & Wang, Yanjie & Zhang, Shunming & Huang, Helen, 2023. "The impact of ambiguity-loving attitude on market participation and asset pricing," Economic Modelling, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003395
    DOI: 10.1016/j.econmod.2023.106527
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    More about this item

    Keywords

    Ambiguity loving; Limited participation; Crowding-out effect; Asset pricing; General equilibrium;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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