Mele, Antonio and Sangiorgi, Francesco (2009) Ambiguity, information acquisition and price swings in asset markets. Discussion paper, 633. Financial Markets Group, London School of Economics and Political Science, London, UK.
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This paper studies asset markets in which ambiguity averse investors face Knightian uncertainty about expected payos. The same investors, however, might wish to resolve their uncertainty, although not risk, by just purchasing information. In these markets, uninformed and, hence, ambiguity averse, agents may coexist with informed agents, as a result of a rational information acquisition process. Moreover, there are complementaries in information acquisition, multiplicity of equilibria, history-dependent prices, and large price swings occurring after small changes in the uncertainty surrounding the asset expected payos. Our model suggests the importance of uncertainty, as a new channel for episodes of extreme price volatility, media frenzies and media glooms.
|Item Type:||Monograph (Discussion Paper)|
|Additional Information:||© 2009 The Authors|
|Library of Congress subject classification:||H Social Sciences > HB Economic Theory|
|Sets:||Research centres and groups > Financial Markets Group (FMG)
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