Journal of Finance Vol. 63 No. 1 2008

Ambiguity, Information Quality, and Asset Pricing

Larry G. Epstein^1,2; Martin Schneider^3,4,2

¹ University of Rochester · ² New York University · ³ New Economics Foundation · ⁴ Cornell University

Abstract

When ambiguity‐averse investors process news of uncertain quality, they act as if they take a worst‐case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change.

DOI

10.1111/j.1540-6261.2008.01314.x

Volume

63

Issue

1

Pages

197-228

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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