Should I Stay or Should I Go? Trading Behavior Under Ambiguity

81 Pages Posted: 17 Jun 2020

See all articles by Azi Ben-Rephael

Azi Ben-Rephael

Rutgers Business School - Rutgers University

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: June 17, 2020

Abstract

We provide new empirical evidence on investors' firm-level trading behavior in response to daily changes in stock ambiguity-Knightian uncertainty. The effect of ambiguity is distinct from and contrasts with the well-documented effect of risk, and shares a similar economic significance. An increase in ambiguity is associated with a subsequent reduction in stock and option trading and holdings, and is consistent with limited participation. A similar response is triggered by closest peers' ambiguity, suggesting information spillovers. Interestingly, an increase in ambiguity is associated with a subsequent increase in book-depth and a lower price impact, consistent with information inertia.

Keywords: Knightian uncertainty, Ambiguity measure, Ambiguity aversion, Limited participation, Portfolio inertia, Information inertia, Liquidity, Expected utility with uncertain probabilities

JEL Classification: D81, D83, G11, G12

Suggested Citation

Ben-Rephael, Azi and Izhakian, Yehuda (Yud), Should I Stay or Should I Go? Trading Behavior Under Ambiguity (June 17, 2020). Available at SSRN: https://ssrn.com/abstract=3628757 or http://dx.doi.org/10.2139/ssrn.3628757

Azi Ben-Rephael (Contact Author)

Rutgers Business School - Rutgers University ( email )

HOME PAGE: http://https://sites.google.com/site/abenreph

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://people.stern.nyu.edu/yizhakia/

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