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Ambiguity aversion and stock market participation: An empirical analysis

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  • Antoniou, Constantinos
  • Harris, Richard D.F.
  • Zhang, Ruogu

Abstract

Theoretical models of portfolio choice that incorporate ambiguity predict that investors’ propensity to invest in equities is reduced when ambiguity in the stock market increases. Although this hypothesis stems from the extant theoretical literature, there is no empirical work examining whether it is supported in the data. We test this hypothesis, measuring participation using equity fund flows and ambiguity with dispersion in analyst forecasts about aggregate returns. Our results confirm this hypothesis, as we show that, controlling for other factors that affect flows, increases in ambiguity are associated with outflows from equity funds. Moreover, using data from the Survey of Consumer Finances, we find that increases in ambiguity significantly reduce the likelihood that the average household invests in equities.

Suggested Citation

  • Antoniou, Constantinos & Harris, Richard D.F. & Zhang, Ruogu, 2015. "Ambiguity aversion and stock market participation: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 57-70.
  • Handle: RePEc:eee:jbfina:v:58:y:2015:i:c:p:57-70
    DOI: 10.1016/j.jbankfin.2015.04.009
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    3. Izhakian, Yehuda & Yermack, David, 2017. "Risk, ambiguity, and the exercise of employee stock options," Journal of Financial Economics, Elsevier, vol. 124(1), pages 65-85.
    4. Ruonan Jia & Ellen Furlong & Sean Gao & Laurie R Santos & Ifat Levy, 2020. "Learning about the Ellsberg Paradox reduces, but does not abolish, ambiguity aversion," PLOS ONE, Public Library of Science, vol. 15(3), pages 1-24, March.
    5. Yehuda Izhakian & David Yermack & Jaime F. Zender, 2016. "Ambiguity and the Tradeoff Theory of Capital Structure," NBER Working Papers 22870, National Bureau of Economic Research, Inc.
    6. Rosa M. Mayoral & Eleuterio Vallelado, 2017. "Beyond rational behaviour: the non-financial variables that condition shareholder action during a takeover," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 20(3), pages 254-270, July.
    7. Milo Bianchi & Jean-Marc Tallon, 2019. "Ambiguity Preferences and Portfolio Choices: Evidence from the Field," Management Science, INFORMS, vol. 65(4), pages 1486-1501, April.
    8. Luo, Di & Mishra, Tapas & Yarovaya, Larisa & Zhang, Zhuang, 2021. "Investing during a Fintech Revolution: Ambiguity and return risk in cryptocurrencies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    9. Jean Paul Rabanal & Aleksei Chernulich & John Horowitz & Olga A. Rud & Manizha Sharifova, 2019. "Market timing under public and private information," Working Papers 151, Peruvian Economic Association.
    10. Arkadiy V. Sakhartov, 2018. "Stock market undervaluation of resource redeployability," Strategic Management Journal, Wiley Blackwell, vol. 39(4), pages 1059-1082, April.
    11. Takayuki Ogawa & Jun Sakamoto, 2018. "Welfare Implications of Mitigating Investment Uncertainty," Discussion Papers in Economics and Business 18-33-Rev., Osaka University, Graduate School of Economics, revised Dec 2018.
    12. Brenner, Menachem & Izhakian, Yehuda, 2018. "Asset pricing and ambiguity: Empirical evidence⁎," Journal of Financial Economics, Elsevier, vol. 130(3), pages 503-531.
    13. Chao Tang, 2017. "Ambiguity and Investment Decisions: An Empirical Analysis on Mutual Fund Investor Behaviour," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 3(3), pages 38-46, September.

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    More about this item

    Keywords

    Stock market participation; Ambiguity aversion; Fund flows;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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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