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14
Ambiguity, information quality and asset pricing
- 2007, J. Finance
, 2004
"... When ambiguity averse investors process news of uncertain quality, they act as if they take a worst-case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamen ..."
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Cited by 52 (7 self)
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When ambiguity averse investors process news of uncertain quality, they act as if they take a worst-case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce negative skewness in asset returns, increase price volatility and induce ambiguity premia that depend on idiosyncratic risk in fundamentals. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change. This helps to explain the reaction of markets to events like 9/11/2001. 1
Disclosure to a credulous audience: The role of limited attention
, 2001
"... We model limited attention as incomplete usage of publicly available information. Informed players decide whether or not to disclose to observers who sometimes neglect either disclosed signals or the implications of non-disclosure. These observers may choose ex ante how to allocate their limited att ..."
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Cited by 14 (6 self)
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We model limited attention as incomplete usage of publicly available information. Informed players decide whether or not to disclose to observers who sometimes neglect either disclosed signals or the implications of non-disclosure. These observers may choose ex ante how to allocate their limited attention. In equilibrium observers are unrealistically optimistic, disclosure is incomplete, neglect of disclosed signals increases disclosure, and neglect of a failure to disclose reduces disclosure. Regulation requiring greater disclosure can reduce observers’ belief accuracies and welfare. Disclosure in one arena affects perceptions in fundamentally unrelated arenas, owing to cue competition, salience, and analytical interference. Disclosure in one arena can crowd out disclosure in another.
Do investors value smooth performance
- Journal of Financial Economics
, 2008
"... annual meeting for their many helpful suggestions. A special thanks to Jacqueline Sue Moffitt and Betty ..."
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Cited by 14 (1 self)
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annual meeting for their many helpful suggestions. A special thanks to Jacqueline Sue Moffitt and Betty
AMBIGUITY, INFORMATION QUALITY AND ASSET PRICING ∗
, 2005
"... When ambiguity averse investors process news of uncertain quality, they act as if they take a worst-case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamen ..."
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Cited by 1 (0 self)
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When ambiguity averse investors process news of uncertain quality, they act as if they take a worst-case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce skewness in asset returns and induce ambiguity premia that depend on idiosyncratic risk in fundamentals. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change. This helps to explain the reaction of markets to events like 9/11/2001. 1
NOISE VS. NEWS IN EQUITY RETURNS
, 2006
"... An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: Twww.CESifo-group.deT ..."
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An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: Twww.CESifo-group.deT
Discussion Paper No. 2003/07 Idiosyncratic Risk in the 1990s: Is It an IT Story?
, 2003
"... This paper examines trends in idiosyncratic risk in different ‘new economy ’ and ‘old economy ’ industries, and explores whether these developments can be attributed to the use of IT. A CAPM-based decomposition of equity returns is employed to estimate idiosyncratic risk. The results provide evidenc ..."
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This paper examines trends in idiosyncratic risk in different ‘new economy ’ and ‘old economy ’ industries, and explores whether these developments can be attributed to the use of IT. A CAPM-based decomposition of equity returns is employed to estimate idiosyncratic risk. The results provide evidence of an increase in idiosyncratic risk in the 1990s. A substantial part reflects high volatility of firms in the IT sector, and in particular that of new IT firms. However, it is not clear whether the increase in idiosyncratic risk results from changes in the risk perception of financial markets or from new ways of firm organization’, production and competition related to IT. The jump in volatility in 1998 supports the view that the perception of risk by equity investors has changed. The positive relation between the share of intangible assets (as a proxy for IT-related changes) and the increase in firm-specific risk in the 1990s is consistent with the view that IT increases the uncertainty with respect to firm valuation, particularly if associated with a fundamental change in the business model.
Neglected risks in mutual fund performance measurement: An additional cost to stock-picking.
, 2012
"... This paper takes a closer look at utility based performance measurement proposed by Goetzmann et al. (2007) and used in popular Morningstar star ratings. Utility based performance measures offer a very intuitive way of risk correction and are hard to manipulate. They require, however, a proper bench ..."
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This paper takes a closer look at utility based performance measurement proposed by Goetzmann et al. (2007) and used in popular Morningstar star ratings. Utility based performance measures offer a very intuitive way of risk correction and are hard to manipulate. They require, however, a proper benchmark measure to filter out lucky funds. I propose to use the Daniel et al. (1997) (DGTW) characteristic based benchmark portfolios as benchmarks for the utility based performance measure. I find that the DGTW selection measure consistently overestimates the manager’s selection skills in certainty equivalent terms, and that this overestimation can be decomposed into an idiosyncratic and a systematic component. In diversified fund portfolios, the certainty equivalent selection measure is, on average, 87bps higher than in undiversified fund portfolios. The remaining undiversifiable risks cost 47bps per year in certainty equivalent terms and can be explained in part be imprecise correction for known systematic risk factors, in part by unknown but undiversifiable risk factors. The certainty equivalent measure captures risk particularly well in years with high moment realizations of the CRSP value weighted index.
Keywords: Jensen’s Inequality, Asset Pricing Test
"... for helpful comments on an earlier version of the paper which was circulated under the title Asset Pricing and Mispricing. We also thank participants in seminars at the Conference of Barclays Global Investors, ..."
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for helpful comments on an earlier version of the paper which was circulated under the title Asset Pricing and Mispricing. We also thank participants in seminars at the Conference of Barclays Global Investors,
Earnings volatility, cash °ow volatility, and ¯rm value 1
"... University and the University of Utah for their many helpful suggestions. The ¯rst author also wishes to thank the Darden School Foundation and the Batten Institute for summer support and the second author a This paper presents empirical evidence that both earnings and cash °ow volatility are negati ..."
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University and the University of Utah for their many helpful suggestions. The ¯rst author also wishes to thank the Darden School Foundation and the Batten Institute for summer support and the second author a This paper presents empirical evidence that both earnings and cash °ow volatility are negatively valued by investors. The magnitude of the e®ect is substantial. A one standard deviation increase in earnings (cash °ow) volatility is associated with a 6-21 percent (0-14 percent) decrease in ¯rm value. Consistent with investors ' and analysts ' focus on earnings and managers ' focus on earnings smoothing but inconsistent with broad ¯nancial theory, we ¯nd that the value e®ect of earnings volatility often dominates that of cash °ow volatility. We also ¯nd di®erences in the volatility e®ect depending on size, leverage, and earnings/cash °ow level. Our results are consistent with risk management theory and suggest that managers ' e®orts to produce Corporate risk management theory argues that shareholders are better o ® if a ¯rm maintains smooth cash °ows. For example, Froot, Scharfstein, and Stein (1993) argue that smooth cash
