Ambiguity, Information Acquisition and Price Swings in Asset Markets

Antonio Mele and Francesco Sangiorgi

FMG Discussion Papers from Financial Markets Group

Abstract: This paper studies asset markets in which ambiguity averse investors face Knightian uncertainty about expected payoffs. The same investors, however, might wish to resolve their uncertainty, although not risk, by just purchasing information. In these markets, uninformed and, hence, ambiguity averse, agents may coexist with informed agents, as a result of a rational information acquisition process. Moreover, there are complementaries in information acquisition, multiplicity of equilibria, history-dependent prices, and large price swings occurring after small changes in the uncertainty surrounding the asset expected payoffs. Our model suggests the importance of uncertainty, as a new channel for episodes of extreme price volatility, media frenzies and media glooms.

Date: 2009-06
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Working Paper: Ambiguity, information acquisition and price swings in asset markets (2009)
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