Ambiguity, information processing, and financial intermediation

Leyla Jianyu Han, Kenneth Kasa and Yulei Luo

Journal of Economic Theory, 2024, vol. 222, issue C

Abstract: This paper incorporates ambiguity and information processing constraints into the He and Krishnamurthy (2012) model of intermediary asset pricing. Financial intermediaries possess greater information processing capacity than households. In response, households optimally choose to delegate their investment decisions. The contractual relationship between households and intermediaries is subject to a moral hazard friction, which results in a financial constraint. We show that ambiguity aversion not only amplifies households' incentives to delegate but also tightens the financial constraint. The calibrated model can quantitatively explain both the unconditional and time-varying moments of observed asset prices while endogenously generating an empirically consistent crisis frequency.

Keywords: Ambiguity; Rational inattention; Portfolio delegation; Intermediary asset pricing; Financial crisis (search for similar items in EconPapers)
JEL-codes: D81 G01 G11 G20 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:222:y:2024:i:c:s0022053124001285

DOI: 10.1016/j.jet.2024.105922

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