Better the Devil You Know Than the Devil You Don't — Financial Crises between Ambiguity Aversion and Selective Perception
20 Pages Posted: 8 Jun 2017 Last revised: 23 Jan 2018
Date Written: January 22, 2018
During financial crises, market participants are pressurized and presumably prone to emotional biased decisions. We use the Economic Policy Uncertainty Indicator and Dow Jones Industrial Average as well as Nikkei 225 GARCH volatilities to test for ambiguity aversion and selective perception of investors. For most crises, we find a significant link between uncertainty and market volatility. However, with respect to ambiguity aversion, the causality differs between crises indicating that investors may not always be driven by uncertainty. Regarding selective perception, we find significant results for the Dot.Com and subprime crises, but not for the Japanese asset price bubble and the Asian crisis.
Keywords: Ambiguity Aversion, Economic Policy, Financial Crisis, Financial Regulation, Monetary Policy, Selective Perception, Uncertainty
JEL Classification: G01, G02, G15, N22
Suggested Citation: Suggested Citation