Ambiguity and Information Processing in a Model of Intermediary Asset Pricing

Leyla Jianyu Han and Kenneth Kasa

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: The paper incorporates ambiguity and information processing contraints into a model of intermediary asset pricing. Financial intermediaries are assumed to possess greater information processing capacity. Households purchase this capacity, and then delegate their investment decisions to intermediaries. As in He and Krishnamurthy (2012), the delegation contract is constrained by a moral hazard problem, which gives rise to a minimum capital requirement. Both agents have a preference for robustness, reflecting ambiguity about asset returns (Hansen and Sargent (2008)). We show that ambiguity aversion tightens the capital constraint, and amplifies its effects. Indirect inference is used to calibrate the model's parameters to the stochastic properties of asset returns. Detection error probabilities are used to discipline the degree of ambiguity aversion. The model can explain both the unconditional moments of asset returns and their state dependence, even with DEPs in excess of 20%.

Keywords: Ambiguity; Information Processing; Asset Pricing; Financial Crisis (search for similar items in EconPapers)
JEL-codes: D81 G01 G12 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-cfn, nep-cta and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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