Ambiguity and information tradeoffs

Nihad Aliyev

Journal of Economic Dynamics and Control, 2025, vol. 179, issue C

Abstract: We model investors facing ambiguity about the number of informed traders and characterize equilibrium in both financial and information markets. In the financial market, this ambiguity generates a premium that can be positive or negative, depending on traders' ambiguity attitude. The premium always increases with ambiguity aversion but only increases with ambiguity level when traders are sufficiently ambiguity averse. We show that traders' effective ambiguity aversion increases with the number of informed traders, resulting in a non-monotonic relation between the equity premium and the number of informed traders. In the information market, ambiguity about the number of informed traders emerges endogenously from a range of information acquisition costs.

Keywords: Ambiguity; Ambiguity aversion; Equity premium; Information acquisition (search for similar items in EconPapers)
JEL-codes: D4 D81 D82 G14 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:179:y:2025:i:c:s0165188925001460

DOI: 10.1016/j.jedc.2025.105180

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