​Ambiguity, Information Processing, and Financial Intermediation

49 Pages Posted: 3 Jun 2019 Last revised: 17 Jan 2024

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 incorporates 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. In response, households optimally choose to delegate their investment decisions. The contractual relationship between households and intermediaries is subject to a moral hazard friction, which results in a financial constraint. We show that ambiguity aversion not only amplifies households' incentives to delegate but also tightens the financial constraint. The calibrated model can quantitatively explain both the unconditional and time-varying moments of observed asset prices, while endogenously generating an empirically consistent crisis frequency.

Keywords: Ambiguity, Rational Inattention, Portfolio Delegation, Intermediary Asset Pricing, Financial Crisis

JEL Classification: D81, E44, G01, G11, G12, G20

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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