​Ambiguity, Information Processing, and Financial Intermediation

44 Pages Posted: 3 Jun 2019 Last revised: 30 Sep 2022

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: September 8, 2022

Abstract

This paper provides a micro-foundation for intermediation by incorporating ambiguity and information processing constraints into the He and Krishnamurthy (2012) model of intermediary asset pricing. Financial intermediaries possess greater information processing capacity than households, who optimally choose to delegate their investment decisions because they are less efficient in processing information. We show that investor ambiguity aversion tightens the capital constraint that arises from the intermediary's moral hazard problem, and amplifies the impact of financial intermediation on equilibrium asset prices. The calibrated model can quantitatively explain both the unconditional and time-varying moments of asset returns in the data.

Keywords: Ambiguity, Rational Inattention, Asset Pricing, Financial Crisis

JEL Classification: D81, G01, G12

Suggested Citation

Han, Leyla Jianyu and Kasa, Kenneth and Luo, Yulei, ​Ambiguity, Information Processing, and Financial Intermediation (September 8, 2022). 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

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