Trading Ambiguity: A Tale of Two Heterogeneities

54 Pages Posted: 3 Dec 2018 Last revised: 12 Jun 2019

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: June 7, 2019

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, equilibrium prices, and trade upon arrival of public information, and show, in each case, there are departures from the outcome in 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 size and value premia, the empirical security market line being flatter than the one predicted by the CAPM, and the observation that earnings announcements are often followed by significant trading volume with small price change.

Keywords: ambiguity, ambiguity aversion, asset pricing, cross-sectional returns, 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 (June 7, 2019). 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 )

Register to save articles to
your library

Register

Paper statistics

Downloads
92
Abstract Views
681
rank
278,300
PlumX Metrics