Trading Ambiguity: A Tale of Two Heterogeneities

50 Pages Posted: 3 Dec 2018 Last revised: 25 Aug 2021

See all articles by Sujoy Mukerji

Sujoy Mukerji

Queen Mary University of London; International Centre for Economic Research (ICER)

Han N. Ozsoylev

Koc University - College of Administrative Sciences and Economics

Jean-Marc Tallon

Paris School of Economics

Date Written: August 22, 2021

Abstract

We consider financial markets with heterogeneously ambiguous assets and heterogeneously ambiguity averse investors. Investors' preferences, a version of the smooth ambiguity model, are a parsimonious extension of the standard mean-variance framework. We consider, in a unified setting, portfolio choice, and trade upon arrival of public information, and show, in both cases, there are systematic departures from the predictions of standard theory. These departures are of significance as they occur in the direction of empirical regularities that belie the standard theory. In particular, our theory speaks to several puzzling phenomena in a unified fashion: the asset allocation puzzle, the observation that earnings announcements are often followed by significant trading volume with small price change, and that increases in uncertainty are positively associated with increased trading activity and portfolio rebalancing toward safer assets by individual (retail) investors.

Keywords: ambiguity, ambiguity aversion, earnings announcements, parameter uncertainty, portfolio choice, trading volume

JEL Classification: D81, G11, G12

Suggested Citation

Mukerji, Sujoy and Ozsoylev, Han N. and Tallon, Jean-Marc, Trading Ambiguity: A Tale of Two Heterogeneities (August 22, 2021). Available at SSRN: https://ssrn.com/abstract=3290605 or http://dx.doi.org/10.2139/ssrn.3290605

Sujoy Mukerji

Queen Mary University of London ( email )

Mile End
Mile End Road
London, London E1 4NS
United Kingdom

International Centre for Economic Research (ICER)

Villa Gualino
Viale Settimio Severo, 63
10133 Torino
Italy

Han N. Ozsoylev (Contact Author)

Koc University - College of Administrative Sciences and Economics ( email )

Rumelifeneri Yolu
Sariyer 80910, Istanbul
Turkey

Jean-Marc Tallon

Paris School of Economics ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
187
Abstract Views
1,525
rank
203,090
PlumX Metrics