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Ambiguity in asset pricing and portfolio choice: a review of the literature

  • Massimo Guidolin

    ()

  • Francesca Rinaldi

    ()

We survey the literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices. This ambiguity literature has led to a number of significant advances in our ability to rationalize empirical features of asset returns and portfolio decisions, such as the failure of the two-fund separation theorem in portfolio decisions, the modest exposure to risky securities observed for a majority of investors, the home equity preference in international portfolio diversification, the excess volatility of asset returns, the equity premium and the risk-free rate puzzles, and the occurrence of trading break-downs. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s11238-012-9343-2
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Article provided by Springer in its journal Theory and Decision.

Volume (Year): 74 (2013)
Issue (Month): 2 (February)
Pages: 183-217

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Handle: RePEc:kap:theord:v:74:y:2013:i:2:p:183-217
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