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

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  • Massimo Guidolin
  • Francesca Rinaldi

Abstract

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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  • Massimo Guidolin & Francesca Rinaldi, 2013. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Theory and Decision, Springer, vol. 74(2), pages 183-217, February.
    • Handle: RePEc:kap:theord:v:74:y:2013:i:2:p:183-217
    DOI: 10.1007/s11238-012-9343-2
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    Keywords

    Ambiguity; Ambiguity-aversion; Participation; Liquidity; Asset pricing; G10; G18; D81;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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