Risk versus ambiguity and international security design
Brian Hill and
Tomasz Michalski ()
Journal of International Economics, 2018, vol. 113, issue C, 74-105
We study portfolio allocation and characterize contracts issued by firms in the international financial market when investors exhibit ambiguity aversion and perceive ambiguity in assets issued in foreign locations. Increases in the variance of their risky production process cause firms to issue assets with a higher variable payment (equity). Hikes in investors' perceived ambiguity have the opposite effect, and lead to less risk-sharing. Entrepreneurs from capital-scarce countries finance themselves relatively more through debt than equity. They are thus exposed to higher volatility per unit of consumption. The expected returns on capital invested in capital-scarce countries may also be lower. Such results do not hold in the absence of ambiguity, that is, when investors only perceive risk. New facts uncovered from cross-country firm-level data are consistent with our model.
Keywords: Ambiguity aversion; Risk aversion; Debt/equity choice; International capital flows; International insurance; Home bias (search for similar items in EconPapers)
JEL-codes: F21 F34 G11 G15 D81 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Risk versus ambiguity and international security design (2018)
Working Paper: Risk versus Ambiguity and International Security Design (2014)
Working Paper: Risk Versus Ambiguity and International Security Design (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:113:y:2018:i:c:p:74-105
Access Statistics for this article
Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, AndrÃ©s
More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().