Ambiguity, Information Acquisition and Price Swings in Asset Markets
AbstractThis paper studies asset markets in which ambiguity averse investors face Knightian uncertainty about expected payoffs. The same investors, however, might wish to resolve their uncertainty, although not risk, by just purchasing information. In these markets, uninformed and, hence, ambiguity averse, agents may coexist with informed agents, as a result of a rational information acquisition process. Moreover, there are complementaries in information acquisition, multiplicity of equilibria, history-dependent prices, and large price swings occurring after small changes in the uncertainty surrounding the asset expected payoffs. Our model suggests the importance of uncertainty, as a new channel for episodes of extreme price volatility, media frenzies and media glooms.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp633.
Date of creation: Jun 2009
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- Larry G. Epstein & Martin Schneider, 2010.
"Ambiguity and Asset Markets,"
Annual Review of Financial Economics,
Annual Reviews, vol. 2(1), pages 315-346, December.
- Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer, vol. 48(2), pages 229-242, October.
- 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.
- 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.
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