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Ambiguity shifts and the 2007–2008 financial crisis

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  • Boyarchenko, Nina

Abstract

Faced with doubts about the quality of information and the quality of modeling techniques, ambiguity-averse agents assign higher probabilities to lower utility states, leading to higher CDS premia and lower equity prices. Using data on financial institutions, I find that the sudden increases in credit spreads during the recent crisis can be explained by changes in the amount of ambiguity faced by market participants and changes in how the total amount of ambiguity was distributed between ambiguity about information quality and ambiguity about model quality.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 5 ()
Pages: 493-507

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Handle: RePEc:eee:moneco:v:59:y:2012:i:5:p:493-507

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Web page: http://www.elsevier.com/locate/inca/505566

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Cited by:
  1. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein & Jean Helwege, 2012. "Modeling credit contagion via the updating of fragile beliefs," Working Paper Series WP-2012-04, Federal Reserve Bank of Chicago.
  2. Nina Boyarchenko & Mario Cerrato & John Crosby & Stewart Hodges, 2012. "No good deals—no bad models," Staff Reports 589, Federal Reserve Bank of New York.
  3. Goodman, James, 2014. "Evidence for ecological learning and domain specificity in rational asset pricing and market efficiency," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 48(C), pages 27-39.

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