Asset pricing and ambiguity: Empirical evidence

By Menachem Brenner, Yehuda Izhakian. Journal of Financial Economics, 2018

163 citations recorded by the source corpus.

We introduce ambiguity in conjunction with risk to study the relation between risk, ambiguity, and expected returns. Distinguishing between ambiguity and attitudes toward ambiguity, we develop an empirical methodology for measuring the degree of ambiguity and for assessing attitudes toward ambiguity from market data. The main findings indicate that ambiguity in the equity market is priced. Introducing ambiguity alongside risk provides stronger evidence on the role of risk in explaining expected returns in the equity markets. The findings also indicate that investors’ level of aversion to or love for ambiguity is contingent on the expected probability of favorable returns.

Subfields: Economics and Econometrics, Finance, General Decision Sciences

View Paper: https://www.semanticscholar.org/paper/bcba0b647901b550c0e26131d8fe817e6d16c756

Citations in the corpus

• Expected Utility with Uncertain Probabilities Theory (2017, unknown): “Brenner and Izhakian (2016) employ the EUUP framework to study the risk–ambiguity– return relationship in the stock market.”