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Information in Equity Markets with Ambiguity-Averse Investors

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  • Judson A. Caskey

Abstract

This paper shows that persistent mispricing is consistent with a market that includes ambiguity-averse investors. In particular, ambiguity-averse investors may prefer to trade based on aggregate signals that reduce ambiguity at the cost of a loss in information. Equilibrium prices may therefore fail to impound publicly available information. While this creates profit opportunities for ambiguity-neutral investors, ambiguity-averse investors perceive that the benefit of ambiguity reduction outweighs the cost of trading against investors who have superior information. The model can explain both underreaction, such as that evident in postearnings announcement drifts and momentum, and overreaction to accounting accruals. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 22 (2009)
Issue (Month): 9 (September)
Pages: 3595-3627

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Handle: RePEc:oup:rfinst:v:22:y:2009:i:9:p:3595-3627

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Cited by:
  1. Martin Schneider, 2010. "The Research Agenda: Martin Schneider on Multiple Priors Preferences and Financial Markets," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 11(2), April.
  2. Massimo Guidolin & Francesca Rinaldi, 2013. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Theory and Decision, Springer, vol. 74(2), pages 183-217, February.
  3. Ron Bird & Danny Yeung, 2010. "How Do Investors React Under Uncertainty?," Working Paper Series 8, The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney.
  4. Jayant Ganguli & Scott Condie & Philipp Karl Illeditsch, 2012. "Information Inertia," Economics Discussion Papers 719, University of Essex, Department of Economics.
  5. Fabio Maccheroni & Massimo Marinacci & Doriana Ruffino, 2013. "Alpha as Ambiguity: Robust Meanā€Variance Portfolio Analysis," Econometrica, Econometric Society, vol. 81(3), pages 1075-1113, 05.
  6. Buckley, Winston & Long, Hongwei & Perera, Sandun, 2014. "A jump model for fads in asset prices under asymmetric information," European Journal of Operational Research, Elsevier, vol. 236(1), pages 200-208.
  7. : Constantinos Antoniou & : Richard D.F. Harris & : Ruogu Zhang, 2013. "Ambiguity Aversion and Stock Market Participation: Evidence from Fund Flows," Working Papers wpn13-01, Warwick Business School, Finance Group.
  8. Han Ozsoylev & Jan Werner, 2011. "Liquidity and asset prices in rational expectations equilibrium with ambiguous information," Economic Theory, Springer, vol. 48(2), pages 469-491, October.
  9. Jayant Ganguli & Scott Condie, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 720, University of Essex, Department of Economics.
  10. Krahnen, Jan Pieter & Ockenfels, Peter & Wilde, Christian, 2014. "Measuring ambiguity aversion: A systematic experimental approach," SAFE Working Paper Series 55, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  11. Panayotis Artikis & Georgia Nifora, 2011. "Leverage and Returns in Three Countries of Southern European Region," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 3-26.
  12. Ron Bird & Daniel Choi & Danny Yeung, 2014. "Market uncertainty, market sentiment, and the post-earnings announcement drift," Review of Quantitative Finance and Accounting, Springer, vol. 43(1), pages 45-73, July.
  13. Edison G. Yu, 2013. "Dynamic market participation and endogenous information aggregation," Working Papers 13-42, Federal Reserve Bank of Philadelphia.
  14. Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer, vol. 48(2), pages 229-242, October.

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