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Ambiguity shifts and the 2007–2008 financial crisis

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Listed author(s):
  • Boyarchenko, Nina

Abstract

Faced with doubts about the quality of information and the quality of modeling techniques, ambiguity-averse agents assign higher probabilities to lower utility states, leading to higher CDS premia and lower equity prices. Using data on financial institutions, I find that the sudden increases in credit spreads during the recent crisis can be explained by changes in the amount of ambiguity faced by market participants and changes in how the total amount of ambiguity was distributed between ambiguity about information quality and ambiguity about model quality.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304393212000530
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 5 ()
Pages: 493-507

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Handle: RePEc:eee:moneco:v:59:y:2012:i:5:p:493-507
DOI: 10.1016/j.jmoneco.2012.04.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Epstein, Larry G. & Miao, Jianjun, 2003. "A two-person dynamic equilibrium under ambiguity," Journal of Economic Dynamics and Control, Elsevier, vol. 27(7), pages 1253-1288, May.
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Cited by:

  1. Wilde, Christian & Krahnen, Jan Pieter & Ockenfels, Peter, 2014. "Measuring Ambiguity Aversion: A Systematic Experimental Approach," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100557, Verein für Socialpolitik / German Economic Association.
  2. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein & Jean Helwege, 2015. "Modeling Credit Contagion via the Updating of Fragile Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 28(7), pages 1960-2008.
  3. Dow, Sheila, 2016. "Uncertainty: A diagrammatic treatment," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 10, pages 1-25.
  4. Jeleva, Meglena & Tallon, Jean-Marc, 2016. "Ambiguïté, comportements et marchés financiers," L'Actualité Economique, Société Canadienne de Science Economique, vol. 92(1-2), pages 351-383, Mars-Juin.
  5. Trojani, Fabio & Wiehenkamp, Christian & Wrampelmeyer, Jan, 2014. "Ambiguity and Reality," Working Papers on Finance 1418, University of St. Gallen, School of Finance.
  6. Goodman, James, 2014. "Evidence for ecological learning and domain specificity in rational asset pricing and market efficiency," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 48(C), pages 27-39.
  7. Demian Pouzo & Ignacio Presno, 2015. "Sovereign Default Risk and Uncertainty Premia," Papers 1512.06960, arXiv.org.
  8. Nina Boyarchenko & Mario Cerrato & John Crosby & Stewart Hodges, 2012. "No good deals—no bad models," Staff Reports 589, Federal Reserve Bank of New York.
  9. Meglena Jeleva & Jean-Marc Tallon, 2016. "Ambiguïté, comportements et marchés financiers," Post-Print halshs-01109639, HAL.
  10. repec:eee:phsmap:v:482:y:2017:i:c:p:552-568 is not listed on IDEAS
  11. Eduardo Corso, 2015. "Ambiguity and portfolio decisions," BCRA Working Paper Series 201567, Central Bank of Argentina, Economic Research Department.
  12. Demian Pouzo & Ignacio Presno, 2016. "Sovereign Default Risk and Uncertainty Premia," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(3), pages 230-266, July.

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