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Ambiguity and Information Processing in a Model of Intermediary Asset Pricing

Author

Listed:
  • Leyla Jianyu Han
  • Kenneth Kasa

    (Simon Fraser University)

Abstract

The paper incorporates ambiguity and information processing contraints into a model of intermediary asset pricing. Financial intermediaries are assumed to possess greater information processing capacity. Households purchase this capacity, and then delegate their investment decisions to intermediaries. As in He and Krishnamurthy (2012), the delegation contract is constrained by a moral hazard problem, which gives rise to a minimum capital requirement. Both agents have a preference for robustness, reflecting ambiguity about asset returns (Hansen and Sargent (2008)). We show that ambiguity aversion tightens the capital constraint, and amplifies its effects. Indirect inference is used to calibrate the model's parameters to the stochastic properties of asset returns. Detection error probabilities are used to discipline the degree of ambiguity aversion. The model can explain both the unconditional moments of asset returns and their state dependence, even with DEPs in excess of 20%.

Suggested Citation

  • Leyla Jianyu Han & Kenneth Kasa, 2019. "Ambiguity and Information Processing in a Model of Intermediary Asset Pricing," Discussion Papers dp19-04, Department of Economics, Simon Fraser University.
    • Handle: RePEc:sfu:sfudps:dp19-04
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    References listed on IDEAS

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    Cited by:

    1. Yang Hao, 2023. "Financial Market with Learning from Price under Knightian Uncertainty," Working Papers hal-03686748, HAL.

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    More about this item

    Keywords

    Ambiguity; Information Processing; Asset Pricing; Financial Crisis;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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