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Monetary policy uncertainty and ambiguity premium from news

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  • Lin, Lei
  • Tan, Jing

Abstract

Investors dislike ambiguous news when its quality is hard to judge, and then make trading decisions based on a worst-case belief of information quality. We provide empirical evidence on the cross-sectional pricing implications of ambiguity-averse theory induced by poor information quality. Using news-based monetary policy uncertainty (MPU) index in China, we find that stocks with high MPU exposure earn lower average returns compared to stocks with low MPU exposure. This negative MPU effect is asymmetric and stronger in periods of bad MPU news than in periods of good MPU news. The premium for bearing MPU is not common risk compensation, nor is it explained by the well-known firm characteristics.

Suggested Citation

  • Lin, Lei & Tan, Jing, 2025. "Monetary policy uncertainty and ambiguity premium from news," Research in International Business and Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:riibaf:v:80:y:2025:i:c:s0275531925003733
    DOI: 10.1016/j.ribaf.2025.103117
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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