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Asset pricing and ambiguity: Empirical evidence⁎

Menachem Brenner and Yehuda Izhakian

Journal of Financial Economics, 2018, vol. 130, issue 3, 503-531

Abstract: We introduce ambiguity in conjunction with risk to study the relation between risk, ambiguity, and expected returns. Distinguishing between ambiguity and attitudes toward ambiguity, we develop an empirical methodology for measuring the degree of ambiguity and for assessing attitudes toward ambiguity from market data. The main findings indicate that ambiguity in the equity market is priced. Introducing ambiguity alongside risk provides stronger evidence on the role of risk in explaining expected returns in the equity markets. The findings also indicate that investors’ level of aversion to or love for ambiguity is contingent on the expected probability of favorable returns.

Keywords: Ambiguity aversion; Ambiguity measurement; Knightian uncertainty; Equity premium (search for similar items in EconPapers)
JEL-codes: D53 D81 G11 G12 (search for similar items in EconPapers)
Date: 2018
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