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Ambiguity in asset pricing and portfolio choice: a review of the literature

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  • Massimo Guidolin

    ()

  • Francesca Rinaldi

    ()

Abstract

We survey the literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices. This ambiguity literature has led to a number of significant advances in our ability to rationalize empirical features of asset returns and portfolio decisions, such as the failure of the two-fund separation theorem in portfolio decisions, the modest exposure to risky securities observed for a majority of investors, the home equity preference in international portfolio diversification, the excess volatility of asset returns, the equity premium and the risk-free rate puzzles, and the occurrence of trading break-downs. Copyright Springer Science+Business Media New York 2013

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Article provided by Springer in its journal Theory and Decision.

Volume (Year): 74 (2013)
Issue (Month): 2 (February)
Pages: 183-217

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Handle: RePEc:kap:theord:v:74:y:2013:i:2:p:183-217

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Web page: http://www.springerlink.com/link.asp?id=100341

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Keywords: Ambiguity; Ambiguity-aversion; Participation; Liquidity; Asset pricing; G10; G18; D81;

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Cited by:
  1. Kast, Robert & Lapied, André & Roubaud, David, 2014. "Modelling under ambiguity with dynamically consistent Choquet random walks and Choquet–Brownian motions," Economic Modelling, Elsevier, vol. 38(C), pages 495-503.
  2. Caihua Chen & Xindan Li & Caleb Tolman & Suyang Wang & Yinyu Ye, 2013. "Sparse Portfolio Selection via Quasi-Norm Regularization," Papers 1312.6350, arXiv.org.
  3. Pritsker, Matthew, 2013. "Knightian uncertainty and interbank lending," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 85-105.

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