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Ambiguity Aversion, Information Acquisition, and Market Opacity

Author

Listed:
  • Junyong He

    (School of Economics, Beijing International Studies University)

  • Helen Hui Huang

    (Faculty of Business Administration, University of Regina)

  • Shunming Zhang

    (China Financial Policy Research Center, Renmin University of China)

Abstract

We investigate the effect of ambiguity on asset pricing and aggregate welfare. There are two types of traders, transparent and opaque, in the economy. The transparent traders face ambiguity about standard deviation (variance) of returns for extra investment opportunities when they trade. This ambiguity restraints their investment decisions, may lead to higher equity premium and loss of social welfare, cause the negative effects on market outcomes. Our analysis demonstrates that how the regulations, increasing information acquisition cost and reducing market opacity, affect traders' behavior, asset pricing and social welfare through transparent traders' ambiguity.

Suggested Citation

  • Junyong He & Helen Hui Huang & Shunming Zhang, 2020. "Ambiguity Aversion, Information Acquisition, and Market Opacity," Annals of Economics and Finance, Society for AEF, vol. 21(2), pages 263-329, November.
    • Handle: RePEc:cuf:journl:y:2020:v:21:i:2:hehuangzhang
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    References listed on IDEAS

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    More about this item

    Keywords

    Rational expectations equilibrium; Information asymmetry; Switching benefit; Equity premium; Welfare function;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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