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Ambiguity, Information Acquisition and Price Swings in Asset Markets

  • Antonio Mele


  • Francesco Sangiorgi

This paper studies asset markets in which ambiguity averse investors face Knightian uncertainty about expected payoffs. The same investors, however, might wish to resolve their uncertainty, although not risk, by just purchasing information. In these markets, uninformed and, hence, ambiguity averse, agents may coexist with informed agents, as a result of a rational information acquisition process. Moreover, there are complementaries in information acquisition, multiplicity of equilibria, history-dependent prices, and large price swings occurring after small changes in the uncertainty surrounding the asset expected payoffs. Our model suggests the importance of uncertainty, as a new channel for episodes of extreme price volatility, media frenzies and media glooms.

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp633.

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Date of creation: Jun 2009
Date of revision:
Handle: RePEc:fmg:fmgdps:dp633
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  1. Larry Epstein & Martin Schneider, 2005. "Ambiguity, Information Quality and Asset Pricing," RCER Working Papers 519, University of Rochester - Center for Economic Research (RCER).
  2. Epstein Larry G. & Wang Tan, 1995. "Uncertainty, Risk-Neutral Measures and Security Price Booms and Crashes," Journal of Economic Theory, Elsevier, vol. 67(1), pages 40-82, October.
  3. Barlevy, Gadi & Veronesi, Pietro, 2000. "Information Acquisition in Financial Markets," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 79-90, January.
  4. Ricardo J. Caballero & Arvind Krishnamurthy, 2007. "Collective Risk Management in a Flight to Quality Episode," NBER Working Papers 12896, National Bureau of Economic Research, Inc.
  5. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002. "A smooth model of decision making under ambiguity," ICER Working Papers - Applied Mathematics Series 11-2003, ICER - International Centre for Economic Research, revised Apr 2003.
  6. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
  7. Itzhak Gilboa & David Schmeidler, 1989. "Maxmin Expected Utility with Non-Unique Prior," Post-Print hal-00753237, HAL.
  8. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  9. Laura Veldkamp, 2004. "Media Frenzies in Markets for Financial Information," Econometric Society 2004 North American Winter Meetings 4, Econometric Society.
  10. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," NBER Working Papers 3250, National Bureau of Economic Research, Inc.
  11. Judson A. Caskey, 2009. "Information in Equity Markets with Ambiguity-Averse Investors," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3595-3627, September.
  12. Han Ozsoylev & Jan Werner, 2011. "Liquidity and asset prices in rational expectations equilibrium with ambiguous information," Economic Theory, Springer, vol. 48(2), pages 469-491, October.
  13. Diego García & Günter Strobl, 2011. "Relative Wealth Concerns and Complementarities in Information Acquisition," Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 169-207.
  14. Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 951-983.
  15. H. Henry Cao & Tan Wang & Harold H. Zhang, 2005. "Model Uncertainty, Limited Market Participation, and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1219-1251.
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