​Ambiguity, Information Processing, and Financial Intermediation

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