Ambiguity and Investment Decisions: An Empirical Analysis on Mutual Fund Investor Behaviour

The paper empirically studies the relationship between ambiguity and mutual fund investor behaviour. Theoretical models for investment decisions incorporating ambiguity motivate our analyses. While the models indicate that investors would less likely to invest in financial markets when ambiguity increases, there is rare empirical evidence in natural occurring financial data to examine this hypothesis. In this paper, we test the hypothesis with equity fund flow data as for investment decisions and ambiguity with the degree of disagreement in equity analysts’ prediction about asset returns. Our results support the hypothesis that increases in ambiguity could lead to less fund flows and this result remains consistently when adding various control variables affecting fund flows. Besides, we find that heterogeneous impacts of ambiguity: equity funds with high yield targets and active management style are affected more than funds investing in stable stocks; funds with larger proportion of institutional investors are more sensitive and affected by the ambiguity.