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Do ambiguity effects survive in experimental asset markets?

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  • Füllbrunn, Sascha
  • Rau, Holger
  • Weitzel, Utz

Abstract

Despite ample evidence of ambiguity preferences in individual decision making, experimental studies of ambiguity effects in financial markets are scarce and inconclusive. Although a number of theoretical studies explain empirical puzzles in finance with ambiguity preferences, it is not a given that individual ambiguity effects survive in markets. We therefore combine the predominant design for ambiguous prospects in individual decision making, the two-color Ellsberg urn, with predominant designs in financial trading, the double auction and the call market, and compare trading in risky and in ambiguous assets. Our results suggest that markets are able to wash out ambiguity effects, which we do observe in an individual decision making control. We find no effects on transaction prices or quotes and also no effects on volume, volatility, or portfolios. This applies both to double auctions and call markets, with and without simultaneous trading of risky and ambiguous assets, and even in the absence of arbitrage.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44700.

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Date of creation: 28 Feb 2013
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Handle: RePEc:pra:mprapa:44700

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Keywords: ambiguity; experiment; trading; double auction; call market;

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Cited by:
  1. Oechssler, Jörg & Roomets, Alex, 2014. "A Test of Mechanical Ambiguity," Working Papers 0555, University of Heidelberg, Department of Economics.

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