Essays on Financial Markets under Ambiguity and Asymmetric Information

Abstract

The thesis investigates the effects of ambiguity on asset market equilibrium under asymmetric information. To do this, we adopt the model of Grossman and Stiglitz (1980), in which informed traders have information about the true value of a risky asset while uninformed traders have information only about the distribution of the true value. The thesis consists of three essays. In the first and the second essay, we consider ambiguity about the mean of the true value and ambiguity about the variance of the true value is assumed in the third essay. The first essay analyzes asset market equilibrium under two-tiered asymmetric information where informed traders and uninformed traders with and without ambiguity coexist. It is found that if the degree ambiguity or the proportion of ambiguous traders increases, market depth decreases while price volatility increases. On the other hand, liquidity risk increases in the degree of ambiguity, whereas it increases in the proportion of ambiguous traders only when the degree of ambiguity is sufficiently high. In the second essay, we examine how risk aversion and ambiguity interactively affect price volatility and generate excess volatility when all the uninformed traders face ambiguity. Risk aversion plays a dominant role in affecting price volatility and generating excess volatility compared to ambiguity. In particular, if the degree of risk aversion is sufficiently low, ambiguous traders care little about ambiguity of their information and excess volatility does not occur even when the degree of ambiguity is extremely high or almost all traders have ambiguous information. The third essay deals with endogenous information acquisition. All the traders initially face ambiguous information and they decide whether to acquire the information about the true value at some costs. If the cost of information lies in some range, the multiplicity of equilibria occurs due to ambiguity. There are two kinds of equilibria: equilibria with strategic substitutability and with strategic complementarity. The latter is unstable since when a trader purchases information, the other traders have incentives to be informed.