Ambiguity, Information Processing, and Financial Intermediation
Journal of Economic Theory, volume 222, 105922, 2024
52 Pages Posted: 3 Jun 2019 Last revised: 17 Oct 2024
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 Code: D81, E44, G01, G11, G12, G20
JEL Classification: D81, E44, G01, G11, G12, G20
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