 Risk Versus Ambiguity and International Security DesignBrian Hill () and Tomasz Michalski Working Papers from HAL Abstract: We study portfolio allocation in the international financial market when investors exhibit ambiguity aversion towards assets issued in foreign locations. Entrepreneurs located in each country have access to a risky technology and want to attract capital. We characterize contracts issued by firms in such an environment. Increases in the variance of the risky production process causes firms to increase the variable payment (equity) offered to investors. On the other hand, increases in investor ambiguity lead to less risk-sharing. Entrepreneurs located in countries with low levels of domestic wealth issue assets with a higher fixed payment and a lower risky payment. As a result, they are exposed to higher volatility per unit of consumption as they finance themselves relatively more through debt than equity. An increase in ambiguity or ambiguity aversion that characterizes crises may explain flight of capital to capital-abundant countries - dubbed sometimes as "flight to quality". Keywords: ambiguity aversion; risk aversion; debt/equity choice; international capital flows; international insurance; home bias (search for similar items in EconPapers) Published in 2014 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:halshs-00950551 Access Statistics for this paper More papers in Working Papers from HAL |
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