Asset Pricing with Ambiguous Signals: An Experiment

40 Pages Posted: 1 Jun 2020

See all articles by Te Bao

Te Bao

Nanyang Technological University (NTU) - Division of Economics; University of Amsterdam - CeNDEF

John Duffy

University of California, Irvine

Jiahua Zhu

Nanyang Technical University

Date Written: May 3, 2020

Abstract

This paper explores how ambiguous signals and ambiguity aversion influence individuals' expectations and the pricing of asset in experimental financial markets. In line with the theory of Epstein and Schneider (2008) we find that subjects' degree of ambiguity aversion is positively correlated with their expectations about the variance of ambiguous signals. These signals matter for the determination of asset prices. We find that the distribution of the excess return of the asset exhibits negative skewness, and that price volatility is significantly larger under ambiguous signals. Our findings provide evidence in support of the idea that ambiguous information and ambiguity aversion may be a source of negative skewness and excess volatility in financial markets.

Keywords: Ambiguity Aversion, Asset Bubbles, Experimental Finance, Signal Extraction, Negative Skewness

JEL Classification: C91, C92, D82, G12, G40

Suggested Citation

Bao, Te and Duffy, John and Zhu, Jiahua, Asset Pricing with Ambiguous Signals: An Experiment (May 3, 2020). Available at SSRN: https://ssrn.com/abstract=3591779 or http://dx.doi.org/10.2139/ssrn.3591779

Te Bao (Contact Author)

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

University of Amsterdam - CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Jiahua Zhu

Nanyang Technical University ( email )

48 Nanyang Avenue
Singapore, Singapore 639818
Singapore

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

Paper statistics

Downloads
123
Abstract Views
372
rank
270,506
PlumX Metrics