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Safety First, Learning Under Ambiguity, and the Cross-Section of Stock Returns

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  • Ariel M. Viale
  • Luis Garcia-Feijoo
  • Antoine Giannetti

Abstract

We examine the empirical implications of learning under ambiguity for the cross-section of stock returns. We introduce a theoretically-motivated ambiguity measure and find that ambiguity is priced in the cross-section of average stock returns. Ambiguity is not subsumed by state variables known to predict stock returns, nor by value, size, and momentum factors. In R-squared comparative tests, a model that takes ambiguity into account performs better than empirical implementations of the Bayesian learning model, the intertemporal CAPM, and the four-factor model of Fama and French (1993) and Carhart (1997).

Suggested Citation

  • Ariel M. Viale & Luis Garcia-Feijoo & Antoine Giannetti, 2014. "Safety First, Learning Under Ambiguity, and the Cross-Section of Stock Returns," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 4(1), pages 118-159.
    • Handle: RePEc:oup:rasset:v:4:y:2014:i:1:p:118-159.
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    File URL: http://hdl.handle.net/10.1093/rapstu/rat017
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    Citations

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    Cited by:

    1. Lee, Deok-Hyeon & Min, Byoung-Kyu & Kim, Tong Suk, 2019. "Dispersion of beliefs, ambiguity, and the cross-section of stock returns," Journal of Empirical Finance, Elsevier, vol. 50(C), pages 43-56.
    2. Ariel M. Viale & Antoine Giannetti & Luis Garcia-Feijoó, 2020. "The stock market’s reaction to macroeconomic news under ambiguity," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(1), pages 65-97, March.
    3. Lee, Velma & Viale, Ariel M., 2023. "Total factor productivity in East Asia under ambiguity," Economic Modelling, Elsevier, vol. 121(C).
    4. Chen, Qiang & Han, Yu, 2023. "Options market ambiguity and its information content," Journal of Financial Markets, Elsevier, vol. 64(C).
    5. A. Ronald Gallant & Mohammad Jahan-Parvar & Hening Liu, 2015. "Measuring Ambiguity Aversion," Finance and Economics Discussion Series 2015-105, Board of Governors of the Federal Reserve System (U.S.).
    6. Qiang Chen & Yu Han & Ying Huang, 2024. "Market‐wide overconfidence and stock returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(1), pages 3-26, January.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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