Results 1  10
of
32
Fear of the Unknown: Familiarity and Economic Decisions
 Review of Finance
, 2011
"... Conference in Finance for helpful comments. ..."
Confidence Risk and Asset Prices
"... Asset price movements in many cases seem delinked from aggregate economic fundamentals. Forexample, RaviBansal andIvanShaliastovich (2008a) show that frequent large moves in asset prices, i.e. jumps, on average are not correlated with movements in macrovariables (see Table 1 below). Motivated by t ..."
Abstract

Cited by 9 (1 self)
 Add to MetaCart
Asset price movements in many cases seem delinked from aggregate economic fundamentals. Forexample, RaviBansal andIvanShaliastovich (2008a) show that frequent large moves in asset prices, i.e. jumps, on average are not correlated with movements in macrovariables (see Table 1 below). Motivated by this, we present a general equilibrium model in which variation in investor confidence about expected growth determines risk premia and hence asset prices. This confidence risk channel can account for (i) the lack of connection between large assetprice moves and macrovariables such as consumption, (ii)large declinesinassetprices, thatis, the left tail of the return distribution, and (iii) observed predictability of equity returns and consumption growth by the price to dividend ratio. In essence, we present a model in which behaviorally motivated shifts in expectations play an important role for the asset prices. Our economy setup follows a standard longrun risks specification of Ravi Bansal and Amir Yaron (2004), and features Gaussian consumption growth process with timevarying expected growth and volatility; there are no large moves orjumpsintheunderlyingconsumptionanddividenddynamics. Expectedgrowth isnotdirectly observable, and investors learn about it using the crosssection of signals. The timevarying crosssectional varianceof thesignals determines the quality of the information, and therefore the confidence that investors place in their growth forecast. In the longrun risks framework, the fluctuations in confidence risk determines risk premia and asset prices. We model investors as being recencybiased in their expectation formation, that is, they overweigh recent observations as in Werner De Bondt and Richard Thaler (1990). This is important, as in the standard KalmanFilter based expectation formation, periods of low information quality get downweighted, which diminishes the role of the confidence risk channel.
Ambiguity aversion and asset prices in production economies. Working paper.
, 2013
"... Abstract We introduce ambiguity and ambiguity aversion into a standard onesector productionbased real business cycle model where mean productivity growth rates are uncertain. We show that with mild capital adjustment costs and a low coefficient of relative risk aversion, the model can explain sev ..."
Abstract

Cited by 8 (3 self)
 Add to MetaCart
(Show Context)
Abstract We introduce ambiguity and ambiguity aversion into a standard onesector productionbased real business cycle model where mean productivity growth rates are uncertain. We show that with mild capital adjustment costs and a low coefficient of relative risk aversion, the model can explain several salient features about macroeconomic quantities and asset prices including a high equity premium, a low and smooth riskfree rate, a low consumption growth volatility and a high investment growth volatility relative to output growth volatility. Moreover, the model can generate long horizon predictability of equity returns by pricedividend ratios, investmentcapital ratios, Tobin's Q and consumptionwealth ratios. Introducing an unobservable state and Bayesian learning into the model can further account for countercyclical equity premia. JEL Classification: C61; D81; G11; G12.
2010, `The Ambiguity Premium vs. the Risk Premium under Limited Market Participation
"... This paper considers a stock market with ambiguityaverse informed investors under the CARAnormal setting, and studies the relationship between limited market participation and the equity premium which is decomposed into the risk premium and the ambiguity premium. In a rational expectations equili ..."
Abstract

Cited by 6 (0 self)
 Add to MetaCart
This paper considers a stock market with ambiguityaverse informed investors under the CARAnormal setting, and studies the relationship between limited market participation and the equity premium which is decomposed into the risk premium and the ambiguity premium. In a rational expectations equilibrium, limited market participation arises if the largest deviation of investors ’ ambiguity increases sufficiently or if the variance of the stock return decreases sufficiently. In each case, a change in the risk premium and a change in the ambiguity premium may have opposite signs. This paper identifies conditions under which a change with the plus sign dominates and thus the equity premium increases when fewer investors participate in the stock market. JEL classication numbers: D81, D82, G12. Key words: asset price; ambiguity; asymmetric information; rational expectations. I am very grateful to the referee for many valuable comments. I thank Takao Asano, Hiroshi Fujiki,
Private Equity Fund Investing Investment Strategies, Entry Order and Performance
"... own ways as an expression of her own ideas. ..."
(Show Context)
Uncertainty, information acquisition and price swings in asset markets. Review of Economic Studies, forthcoming
, 2015
"... This article analyses costly information acquisition in asset markets with Knightian uncertainty about the asset fundamentals. In these markets, acquiring information not only reduces the expected variability of the fundamentals for a given distribution (i.e. risk). It also mitigates the uncertainty ..."
Abstract

Cited by 3 (0 self)
 Add to MetaCart
This article analyses costly information acquisition in asset markets with Knightian uncertainty about the asset fundamentals. In these markets, acquiring information not only reduces the expected variability of the fundamentals for a given distribution (i.e. risk). It also mitigates the uncertainty about the true distribution of the fundamentals. Agents who lack knowledge of this distribution cannot correctly interpret the information other investors impound into the price. We show that, due to uncertainty aversion, the incentives to reduce uncertainty by acquiring information increase as more investors acquire information. When uncertainty is high enough, information acquisition decisions become strategic complements and lead to multiple equilibria. Swift changes in information demand can drive large price swings even after small changes in Knightian uncertainty.
On Portfolio Separation Theorems with Heterogeneous Beliefs and Attitudes towards Risk
, 2008
"... Bank of Canada working papers are theoretical or empirical worksinprogress on subjects in economics and finance. The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada. ISSN 17019397 © 2008 Bank of CanadaAcknowledgements ..."
Abstract

Cited by 3 (0 self)
 Add to MetaCart
Bank of Canada working papers are theoretical or empirical worksinprogress on subjects in economics and finance. The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada. ISSN 17019397 © 2008 Bank of CanadaAcknowledgements
Ambiguity, Information Acquisition and Price Swings in Asset Markets
, 2009
"... Preliminary draft This paper studies asset markets in which ambiguity averse investors face Knightian uncertainty about expected payo s. The same investors, however, might wish to resolve their uncertainty, although not risk, by just purchasing information. In these markets, uninformed and, hence, a ..."
Abstract

Cited by 1 (0 self)
 Add to MetaCart
Preliminary draft This paper studies asset markets in which ambiguity averse investors face Knightian uncertainty about expected payo s. 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, historydependent prices, and large price swings occurring after small changes in the uncertainty surrounding the asset expected payo s. Our model suggests the importance of uncertainty, as a new channel for episodes of extreme price volatility, media frenzies and media glooms. We thank Paolo Ghirardato, Emre Ozdenoren and Kathy Yuan for discussions, and seminar participants at USI Lugano (Institute of Finance) and brown bags at our institutions for comments. The usual disclaimer applies. 1 1
Managerial Caution, Operating Performance, and Accounting Conservatism
, 2011
"... We investigate the effect of caution in real operating and investment decisions — which can be thought of as real conservatism — on the firm’s profitability and accounting conservatism. We document that firms exhibiting caution in their real decisions are characterized by higher profitability in th ..."
Abstract
 Add to MetaCart
We investigate the effect of caution in real operating and investment decisions — which can be thought of as real conservatism — on the firm’s profitability and accounting conservatism. We document that firms exhibiting caution in their real decisions are characterized by higher profitability in the long run, lower probability of business failure, and lower conditional accounting conservatism. We provide evidence that managerial caution is distinct from riskaversion, overoptimism, and overconfidence. We also argue that precautionary motive provides a more parsimonious explanation for a decrease in discretionary spending than real earnings management. Our results are relevant to accounting because caution is a real property that is strongly related to several accounting variables and has been extensively studied in economics and finance yet the accounting literature to date has largely ignored it.
European Financial Stability Facility
, 2011
"... Inspired by the seminal article of Knight (1921), finance literature has started to develop theoretical models where both risk and uncertainty affect the pricing of financial assets. In the traditional models of finance theory, pricing of assets reflect only risk, since the probability distributions ..."
Abstract
 Add to MetaCart
Inspired by the seminal article of Knight (1921), finance literature has started to develop theoretical models where both risk and uncertainty affect the pricing of financial assets. In the traditional models of finance theory, pricing of assets reflect only risk, since the probability distributions of the outcomes are assumed to be known, or at least, are assumed to be predictable from the past behaviour. Recent theoretical research suggests that Merton’s (1973) intertemporal asset pricing model can be extended to allow disentangling risk and uncertainty in a simple way: the traditional riskreturn relationship is simply augmented by a measure of uncertainty. We apply this theory to the European sovereign bond market data and estimate different variations of GARCHM models, seeking to explain excess bond returns primarily by bidask spread (measure of uncertainty) and by conditional volatility (measure of risk). We also study to which extent the European crises resolution policies have had impact on riskuncertaintyreturn tradeoff. Our preliminary findings suggest that both risk and uncertainty matter for excess bond returns and the European sovereign crises resolution policies have been only partly successful in mitigating the sovereign risk. 1