Do Ambiguity Effects Survive in Experimental Asset Markets?

Abstract

Despite ample evidence of ambiguity preferences in individual decision making, experimental studies of ambiguity eects in nancial markets are scarce and inconclusive. Although a number of theoretical studies explain empirical puzzles in nance with ambiguity preferences, it is not a given that individual ambiguity eects survive in markets. We therefore combine the predominant design for ambiguous prospects in individual decision making, the two-color Ellsberg urn, with predominant designs in nancial trading, the double auction and the call market, and compare trading in risky and in ambiguous assets. Our results suggest that markets are able to wash out ambiguity eects, which we do observe in an individual decision making control. We nd no eects on transaction prices or quotes and also no eects on volume, volatility, or portfolios.This applies both to double auctions and call markets, with and without simultaneous trading of risky and ambiguous assets, and even in the absence of arbitrage.