Trading ambiguity: a tale of two heterogeneities

Sujoy Mukerji, Han Ozsoylev and Jean‐marc Tallon ()
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Jean‐marc Tallon: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: We consider nancial markets with heterogeneously ambiguous assets and heterogeneously ambiguity averse investors. Investors' preferences, a version of the smooth ambiguity model, are a parsimonious extension of the standard mean-variance framework. We consider, in a uni ed setting, portfolio choice, and trade upon arrival of public information, and show, in both cases, there are systematic departures from the predictions of standard theory. These departures are of signi cance as they occur in the direction of empirical regularities that belie the standard theory. In particular, our theory speaks to several puzzling phenomena in a uni ed fashion: the asset allocation puzzle, the observation that earnings announcements are often followed by signi cant trading volume with small price change, and that increases in uncertainty are positively associated with increased trading activity and portfolio rebalancing toward safer assets by individual (retail) investors

Keywords: Ambiguity; Ambiguity aversion; Earnings announcements; Parameter uncertainty; Portfolio choice; Trading volume; Uncertainty shocks (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-upt
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03962563v1
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Published in International Economic Review, 2023, 64 (3), pp.1127-1164. ⟨10.1111/iere.12627⟩

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Related works:
Journal Article: TRADING AMBIGUITY: A TALE OF TWO HETEROGENEITIES (2023)
Working Paper: Trading ambiguity: a tale of two heterogeneities (2023)
Working Paper: Trading ambiguity: a tale of two heterogeneities (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-03962563

DOI: 10.1111/iere.12627

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