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Ambiguity, Information Quality and Asset Pricing

By:

Epstein Larry G

Material type: Article

ArticleLanguage: ENG Series: ; 63Publication details: Feb 2008 0Edition: 1Description: 197-228 PpSubject(s):

Asset Pricing

DDC classification:

Online resources:

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Summary: 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 ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change.

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Item type	Current library	Call number	Status	Date due	Barcode
Articles	Main Library	Eps (Browse shelf(Opens below))	Available		AR9862

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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 ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change.

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