Asset Pricing and Ambiguity: Empirical Evidence

57 Pages Posted: 31 Jan 2012 Last revised: 28 Jan 2020

See all articles by Menachem Brenner

Menachem Brenner

New York University (NYU) - Department of Finance

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: November 16, 2017

Abstract

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.

Keywords: Ambiguity aversion, Ambiguity measurement, Knightian uncertainty, Equity premium

Suggested Citation

Brenner, Menachem and Izhakian, Yehuda (Yud), Asset Pricing and Ambiguity: Empirical Evidence (November 16, 2017). Journal of Financial Economics (JFE), Vol. 130, No. 3, 2018, Available at SSRN: https://ssrn.com/abstract=1996802

Menachem Brenner (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0323 (Phone)
212-995-4233 (Fax)

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://https://people.stern.nyu.edu/yizhakia/

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
2,055
Abstract Views
6,875
rank
10,520
PlumX Metrics