Ambiguity Aversion, Information Acquisition, and Market Opacity

Junyong He (), Helen Huang () and Shunming Zhang ()
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Junyong He: School of Economics, Beijing International Studies University
Helen Huang: Faculty of Business Administration, University of Regina
Shunming Zhang: China Financial Policy Research Center, Renmin University of China

Annals of Economics and Finance, 2020, vol. 21, issue 2, 263-329

Abstract: We investigate the effect of ambiguity on asset pricing and aggregate welfare. There are two types of traders, transparent and opaque, in the economy. The transparent traders face ambiguity about standard deviation (variance) of returns for extra investment opportunities when they trade. This ambiguity restraints their investment decisions, may lead to higher equity premium and loss of social welfare, cause the negative effects on market outcomes. Our analysis demonstrates that how the regulations, increasing information acquisition cost and reducing market opacity, affect traders' behavior, asset pricing and social welfare through transparent traders' ambiguity.

Keywords: Rational expectations equilibrium; Information asymmetry; Switching benefit; Equity premium; Welfare function (search for similar items in EconPapers)
JEL-codes: D81 G11 (search for similar items in EconPapers)
Date: 2020
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