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Ambiguity, Information Acquisition and Price Swings in Asset Markets

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  • Antonio Mele
  • Francesco Sangiorgi

Abstract

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.

Suggested Citation

  • Antonio Mele & Francesco Sangiorgi, 2009. "Ambiguity, Information Acquisition and Price Swings in Asset Markets," FMG Discussion Papers dp633, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp633
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    Cited by:

    1. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 315-346, December.
    2. Illeditsch, PK & Ganguli, J & Condie, S, 2015. "Information Inertia," Economics Discussion Papers 15615, University of Essex, Department of Economics.
    3. Konstantinos Georgalos, 2016. "Dynamic decision making under ambiguity," Working Papers 112111041, Lancaster University Management School, Economics Department.
    4. repec:esx:essedp:719 is not listed on IDEAS
    5. Fulghieri, Paolo & Dicks, David, 2015. "Ambiguity, Disagreement, and Allocation of Control in Firms," CEPR Discussion Papers 10400, C.E.P.R. Discussion Papers.
    6. Xavier Vives, 2014. "On The Possibility Of Informationally Efficient Markets," Journal of the European Economic Association, European Economic Association, vol. 12(5), pages 1200-1239, October.
    7. Jeleva, Meglena & Tallon, Jean-Marc, 2016. "Ambiguïté, comportements et marchés financiers," L'Actualité Economique, Société Canadienne de Science Economique, vol. 92(1-2), pages 351-383, Mars-Juin.
    8. repec:esx:essedp:770 is not listed on IDEAS
    9. Fulghieri, Paolo & Dicks, David, 2016. "Innovation Waves, Investor Sentiment, and Mergers," CEPR Discussion Papers 11082, C.E.P.R. Discussion Papers.
    10. Yu, Edison G., 2018. "Dynamic market participation and endogenous information aggregation," Journal of Economic Theory, Elsevier, vol. 175(C), pages 491-517.
    11. Filzen, Joshua J. & Schutte, Maria Gabriela, 2017. "Comovement, financial reporting complexity, and information markets: Evidence from the effect of changes in 10-Q lengths on internet search volumes and peer correlations," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 19-37.
    12. Corradi, Valentina & Distaso, Walter & Mele, Antonio, 2013. "Macroeconomic determinants of stock volatility and volatility premiums," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 203-220.
    13. Michele Berardi, 2016. "Herding through learning in an asset pricing model," Centre for Growth and Business Cycle Research Discussion Paper Series 223, Economics, The University of Manchester.
    14. repec:esx:essedp:720 is not listed on IDEAS
    15. Han Ozsoylev & Jan Werner, 2011. "Liquidity and asset prices in rational expectations equilibrium with ambiguous information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 469-491, October.
    16. Ganguli, J & Condie, S & Illeditsch, PK, 2012. "Information Inertia," Economics Discussion Papers 5628, University of Essex, Department of Economics.
    17. Martin Schneider, 2010. "The Research Agenda: Martin Schneider on Multiple Priors Preferences and Financial Markets," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 11(2), April.
    18. Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 229-242, October.
    19. Ganguli, Jayant & Condie, Scott, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 5631, University of Essex, Department of Economics.
    20. Fuess, Roland & Ruf, Daniel, 2015. "Pre-Trade Transparency and Return Co-movements in Commercial Real Estate Markets," Working Papers on Finance 1520, University of St. Gallen, School of Finance, revised Jan 2017.
    21. Liyan Yang & Itay Goldstein, 2012. "Information Diversity and Market Efficiency Spirals," 2012 Meeting Papers 349, Society for Economic Dynamics.
    22. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.

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