Premium
Ambiguity, Information Quality, and Asset Pricing
Author(s) -
EPSTEIN LARRY G.,
SCHNEIDER MARTIN
Publication year - 2008
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01314.x
Subject(s) - ambiguity , quality (philosophy) , skewness , ambiguity aversion , capital asset pricing model , economics , information quality , asset (computer security) , risk premium , financial economics , actuarial science , econometrics , microeconomics , computer science , information system , computer security , engineering , programming language , philosophy , epistemology , electrical engineering
When ambiguity‐averse investors process news of uncertain quality, they act as if they take a worst‐case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change.