Information in Equity Markets with Ambiguity-Averse Investors

Posted: 8 Sep 2009

See all articles by Judson Caskey

Judson Caskey

University of California, Los Angeles (UCLA) - Accounting Area

Date Written: September 2009

Abstract

This paper shows that persistent mispricing is consistent with a market that includes ambiguity-averse investors. In particular, ambiguity-averse investors may prefer to trade based on aggregate signals that reduce ambiguity at the cost of a loss in information. Equilibrium prices may therefore fail to impound publicly available information. While this creates profit opportunities for ambiguity-neutral investors, ambiguity-averse investors perceive that the benefit of ambiguity reduction outweighs the cost of trading against investors who have superior information. The model can explain both underreaction, such as that evident in postearnings announcement drifts and momentum, and overreaction to accounting accruals.

Keywords: D81, G11, G14

Suggested Citation

Caskey, Judson, Information in Equity Markets with Ambiguity-Averse Investors (September 2009). The Review of Financial Studies, Vol. 22, No. 9, pp. 3595-3627, 2009, Available at SSRN: https://ssrn.com/abstract=1468192 or http://dx.doi.org/hhn062

Judson Caskey (Contact Author)

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://sites.google.com/site/judsoncaskey/

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