Asset pricing and ambiguity: Empirical evidence

Measuring Ambiguity Attitudes for All (Natural) Events

“…We do not need such derivations. Brenner and Izhakian () and Gallant, Jahan‐Parvar, and Liu ( ) deviated from our approach in assuming second‐order probabilities to capture ambiguity. They made parametric assumptions about the first‐ and second‐order probabilities (assuming normal distributions), including expected utility for risk with constant relative risk aversion, and then fit the remaining parameters to the data for a representative agent.…”

“…Abdellaoui, Baillon, Placido, and Wakker (2011) measured indexes similar to ours but used complex measurements and data fittings, requiring measurements of subjective probabilities, utilities, and event weights. As regards the treatment of unknown beliefs, Brenner and Izhakian (2018) and Gallant, Jahan-Parvar, and Liu (2017) are close to us. They did not assume beliefs given beforehand, but derived them from preferences, as did Abdellaoui et al (2011).…”

Investor ambiguity, systemic banking risk and economic activity: The case of too-big-to-fail

“…Under CU (α-MEP), ambiguity aversion (pessimism) can be viewed as investors' tendency to overweight events with bad outcomes (relative to objective probabilities) when faced with uncertainty, while ambiguity-seeking (optimism) is proxied by investors' propensity to overweight good, but less probable, outcomes displaying gambling or uncertainty-loving comportment (see Schmeidler, 1989;Ghirardato et al, 2004;Chateauneuf et al, 2007). The EUUP-based ambiguity information by Brenner and Izhakian (2018), examined herein for robustness, captures the degree of probabilistic ambiguity in the marketplace but not necessarily the direction of ambiguity. The latter is reflected in our α-MEP ambiguity indicators (e.g., ambiguity pessimism) and is also partly proxied by our CU-based ambiguity measures.…”

“…An interesting extension could consist of separating our c indicator into an uncertainty score of likelihood insensitivity and a pure index of ambiguity aversion or pessimism (e.g., see Abdellaoui et al, 2011;Baillon et al, 2017), and study the economic implications of each component using source functions. For further validation of our findings (and to remedy the above CU limitation), 2 we use the α-MEP specification which captures both pessimism and optimism under ambiguity, and the EUUP-based probabilistic ambiguity proxy by Brenner and Izhakian (2018).…”

“…For robustness, we also model ambiguity using the EUUP framework of Brenner and Izhakian (2018) and Izhakian and Yermack (2017). EUUP-based ambiguity is defined as follows:…”