Ambiguity, Risk Aversion and Excess Volatility
- Title
- Ambiguity, Risk Aversion and Excess Volatility
- Authors
- HAHN, GUANGSUG; KWON, JOON YEOP
- Date Issued
- 2020-12-28
- Publisher
- 한국경제통상학회
- Abstract
- The paper investigates how ambiguous information in stock markets affects the occurrence
of excess volatility of stock prices. To do this, we adopt the framework of Grossman and
Stiglitz (1980) where uninformed traders have ambiguous information about a stock’s fundamental
value. First, we find that excess volatility never arises when only uninformed
traders without ambiguous information are risk-neutral. Including ambiguity and risk aversion
in our model, we carefully investigate the roles of ambiguity and risk aversion in generating
excess volatility. In generating excess volatility, the role of ambiguity depends on risk
aversion. If the degree of risk aversion is sufficiently low, excess volatility does not arise,
even when the degree of ambiguity is extremely high. On the contrary, if traders are sufficiently
risk-averse, excess volatility occurs irrespective of ambiguity. Only when traders are
moderately risk-averse, a higher degree of ambiguity leads to a higher likelihood of excess
volatility.
- URI
- https://oasis.postech.ac.kr/handle/2014.oak/105455
- Article Type
- Conference
- Citation
- KEBA Fall International Conference, 2020-12-28
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