Abstract

MELO, Jimmy. Asset prices under structural ambiguity: Cautious, prudential and conservative portfolios. Ens. polit. econ. [online]. 2016, vol.34, n.80, pp.91-102. ISSN 0120-4483.  https://doi.org/10.1016/j.espe.2016.02.003.

This paper studies the extensive (conservative portfolio) and intensive (cautious and prudential portfolios) effects emerging from two kinds of ambiguity: idiosyncratic and structural. Both kinds of uncertainty induce investors not to participate in some asset markets, which reduces prices through liquidity reduction in those markets. On the other hand, structural uncertainty implies an ambiguity premium discounted from prices and, in equilibrium, a channel of transmission of both effects across assets. The novelty of this paper is that structural uncertainty results from ambiguity on asset sensitivities to macro news aggregated from a micro level, which allows us to identify the macroeconomic linkages among market segments. Using this feature of the model, this paper concludes that current prices react slowly to macro news if the relative weight of ambiguity-averse agents is lower and the objective linkages among assets are weak.

Keywords : Ambiguity; Ambiguity aversion; Asset prices.

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