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Information in Equity Markets with Ambiguity-Averse Investors

Information in Equity Markets with Ambiguity-Averse Investors This paper shows that persistent mispricing is consistent with a market that includes ambiguity-averse investors. In particular, ambiguity-averse investors may prefer to trade based on aggregate signals that reduce ambiguity at the cost of a loss in information. Equilibrium prices may therefore fail to impound publicly available information. While this creates profit opportunities for ambiguity-neutral investors, ambiguity-averse investors perceive that the benefit of ambiguity reduction outweighs the cost of trading against investors who have superior information. The model can explain both underreaction, such as that evident in postearnings announcement drifts and momentum, and overreaction to accounting accruals. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Information in Equity Markets with Ambiguity-Averse Investors

The Review of Financial Studies , Volume 22 (9) – Sep 27, 2009

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References (39)

Publisher
Oxford University Press
Copyright
© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org
Subject
Article
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/hhn062
Publisher site
See Article on Publisher Site

Abstract

This paper shows that persistent mispricing is consistent with a market that includes ambiguity-averse investors. In particular, ambiguity-averse investors may prefer to trade based on aggregate signals that reduce ambiguity at the cost of a loss in information. Equilibrium prices may therefore fail to impound publicly available information. While this creates profit opportunities for ambiguity-neutral investors, ambiguity-averse investors perceive that the benefit of ambiguity reduction outweighs the cost of trading against investors who have superior information. The model can explain both underreaction, such as that evident in postearnings announcement drifts and momentum, and overreaction to accounting accruals.

Journal

The Review of Financial StudiesOxford University Press

Published: Sep 27, 2009

Keywords: JEL Classification D81 G11 G14

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