Endogenous incompleteness of financial markets: The role of ambiguity and ambiguity aversion |
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Authors: | Francesca Rinaldi |
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Institution: | Manchester Business School, Manchester Accounting and Finance Group, MBS Crawford House, Booth Street East, Manchester M13 9PL, United Kingdom |
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Abstract: | Incompleteness of financial markets has been widely questioned in the literature, but traditional research has been mainly focused on the role of transaction costs and asymmetric information in determining such incompleteness. This paper, instead, focuses on agents’ preferences, showing that the introduction of ambiguity and ambiguity aversion may induce investors to restrict their trading to a simpler set of assets, relative to which they are less likely to make errors. |
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Keywords: | Ambiguity Variational preferences Idiosyncratic risk Risk sharing Trading |
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