TRADING AMBIGUITY: A TALE OF TWO HETEROGENEITIES |
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| Authors: | Sujoy Mukerji Han N. Ozsoylev Jean-Marc Tallon |
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| Affiliation: | 1. Queen Mary University of London, U.K.;2. Özyeğin University, Turkey;3. Paris School of Economics, CNRS, 48 Bd Jourdan, 75014, Paris, France |
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| Abstract: | We consider markets with heterogeneously ambiguous assets and heterogeneously ambiguity-averse investors whose preferences are a parsimonious extension of the mean–variance framework. We study portfolio choice and trade upon arrival of public information, and show systematic departures from the predictions of standard theory, that occur in the direction of empirical regularities. In particular, our theory speaks to several phenomena in a unified fashion: the asset allocation puzzle, the observation that earnings announcements are followed by significant trading volume with small price change, and that increases in uncertainty are positively associated with increased trading activity and portfolio rebalancing toward safer assets. |
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