Risk, ambiguity, and equity premium: International evidence

Kim, Eung-Bin; Byun, Suk-Joon

doi:10.1016/j.iref.2021.06.002

Cited by 5 publications

(5 citation statements)

References 44 publications

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“…These results are consistent with the classical paradigm, which states that assets are priced according to their risks [15], thus investors exhibit risk-averse behavior [16,17]. Furthermore, our findings are also coherent with a recent study [12,18,19] that showed that the investors display an ambiguity-seeking attitude.…”

Section: Empirical Analysissupporting

confidence: 92%

Risk and Uncertainty at the Outbreak of the COVID-19 Pandemic

2022

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The classic paradigm in finance maintains that asset returns are paid as a compensation for bearing risk. This study extends the literature and explores whether asset prices are also affected by uncertainty. This research invokes the Expected Utility with Uncertainty Probabilities Model and utilizes the natural experiment conditions of the COVID-19 pandemic outbreak, in order to determine whether investors’ behavior during the sharp economic decline was driven by risk, or uncertainty. We limit this research only to the outbreak of the pandemic, since the recovery of the markets suggests investors have adjusted to the unexpected nature of the crisis. Using high-frequency data of the S&P 500 Index, we estimate the investors’ risk and ambiguity aversions, finding that in the pre-pandemic period investors exhibited risk aversion as well as an ambiguity-seeking attitude, while during the pandemic they demonstrated risk- and ambiguity-neutral behavior. The implications of these findings could suggest that in regular times, the financial markets are operated by risk-averse investors with decreasing risk-averse behavior.

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Section: Empirical Analysissupporting

confidence: 92%

Risk and Uncertainty at the Outbreak of the COVID-19 Pandemic

2022

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“…One of them is uncertainty avoidance reflecting the extent to which the members of a culture feel threatened by ambiguous situations. Intuitively, countries with high uncertainty avoidance score are more prone to ambiguity aversion, also empirically reported by Kim and Byun (2021). The other related dimension is long-term orientation, the extent to which a culture prioritizes an adaptive and pragmatic approach to dealing with challenges rather than maintaining traditions and norms.…”

Section: Introductionmentioning

confidence: 77%

“…Because emerging markets are usually invested for more efficient diversification, international investors should take into account that ambiguity has some unique characteristics in the emerging markets while shaping their portfolio weights. As Kim and Byun (2021) report, noticeably non-linear ambiguity attitudes contingent upon probability of gain seems one of those distinctive features that is valid for most emerging markets. Our results show that ambiguity attitudes on Turkish equity market are also prominently non-linear.…”

Section: Discussionmentioning

confidence: 99%

“…The measure is used by Kim and Byun (2021) to test ambiguity on international markets by using exchange-traded funds (ETFs) traded in the US. The authors conclude that ambiguity aversion is uniform across markets, albeit attitudes do not display linearity, especially for emerging markets.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Therefore, the perceived uncertainty may differ in the US and emerging markets. For example, Kim and Byun (2021) empirically find that higher transparency decreases the ambiguity aversion. Turkey, as a major emerging market, is no exception among its less transparent peers, as its transparency and disclosure score calculated via Standard and Poor's methodology is at best moderate (Aksu and Kosedag, 2006;Patel et al, 2002).…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Ambiguity and asset prices: a closer look in an emerging market

Cevheroglu-Acar

Karahan

2023

RBF

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PurposeThis study empirically documents the effect of ambiguity on stock returns in a major emerging market along with the ambiguity attitudes under various market conditions.Design/methodology/approachAmbiguity is measured as the volatility of return probability distributions extracted from high frequency intraday data via a method developed by Brenner and Izhakian (2018). The impact of ambiguity is then tested on stock market returns.FindingsThe results show that ambiguity is a priced factor in Turkish stock market with a positive premium that is distinct from risk premium. In contrast with the findings in the US market, the investors in Turkey show an increasing level of ambiguity aversion as expected probability of favorable returns deviate from the mean value. The investors are effectively ambiguity neutral in lateral markets. The results are robust to testing with higher moments, sentiment measures and under recession conditions.Originality/valueThis study contributes to empirically documenting ambiguity and ambiguity aversion in a major emerging market along with the opportunity to observe international differences in ambiguity attitudes.

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Oil beta uncertainty and global stock returns

Chen

Demirer

2022

Energy Economics

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Risk, ambiguity, and equity premium: International evidence

Cited by 5 publications

References 44 publications

Risk and Uncertainty at the Outbreak of the COVID-19 Pandemic

Risk and Uncertainty at the Outbreak of the COVID-19 Pandemic

Ambiguity and asset prices: a closer look in an emerging market

Oil beta uncertainty and global stock returns

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