Ambiguity and Information Processing in a Model of Intermediary Asset Pricing

38 Pages Posted: 3 Jun 2019 Last revised: 24 Aug 2020

See all articles by Leyla Jianyu Han

Leyla Jianyu Han

Boston University - Questrom School of Business

Kenneth Kasa

Simon Fraser University (SFU) - Department of Economics

Yulei Luo

University of Hong Kong

Date Written: May 12, 2019

Abstract

This paper incorporates ambiguity and information processing constraints into a model of intermediary asset pricing. Financial intermediaries are assumed to possess greater information processing capacity. Households purchase this capacity, and then delegate their investment decisions to intermediaries. As in He and Krishnamurthy (2012), the delegation contract is constrained by a moral hazard problem, which gives rise to a minimum capital requirement. Both households and intermediaries have a preference for robustness, reflecting ambiguity about asset returns (Hansen and Sargent (2008)). We show that ambiguity aversion tightens the capital constraint, and amplifies its effects. Detection error probabilities are used to discipline the degree of ambiguity aversion. The model can explain both the unconditional moments of asset returns and their state dependence, even with DEPs in excess of 20%.

Keywords: Ambiguity, Information Processing, Asset Pricing, Financial Crisis

JEL Classification: D81, G01, G12

Suggested Citation

Han, Leyla Jianyu and Kasa, Kenneth and Luo, Yulei, Ambiguity and Information Processing in a Model of Intermediary Asset Pricing (May 12, 2019). Available at SSRN: https://ssrn.com/abstract=3386888 or http://dx.doi.org/10.2139/ssrn.3386888

Leyla Jianyu Han (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

HOME PAGE: http://www.leylahan.com/

Kenneth Kasa

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Yulei Luo

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

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

Paper statistics

Downloads
137
Abstract Views
925
rank
268,668
PlumX Metrics