Economic uncertainty: Mispricing and ambiguity premium

Cai, Charlie XX ORCID: 0000-0003-1398-3715, Fu, Xi ORCID: 0000-0003-4254-6493 and Kerestecioglu, Semih (2022) Economic uncertainty: Mispricing and ambiguity premium. EUROPEAN FINANCIAL MANAGEMENT, 29 (5). pp. 1702-1751.

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Official URL: http://dx.doi.org/10.1111/eufm.12403

Abstract

<jats:title>Abstract</jats:title><jats:p>We uncover two channels of effect in the financial market when investors face macroeconomic uncertainty. Conditional on a common mispricing index, we find that economic uncertainty exposure (EUE) induces disagreement, which amplifies mispricing. The highest EUE quintile produces an annualised mispricing alpha of 9.96%, more than double the unconditional mispricing effect. An ambiguity premium of 3.84% alpha is documented in the “non‐mispricing” quintile. The EUE‐induced mispricing effect is different from the existing limits of arbitrage explanations. The ambiguity premium is predictably observed during the unfolding of shocks of COVID‐19 to the market.</jats:p>

Item Type:	Article
Uncontrolled Keywords:	ambiguity aversion, cross-section of stock returns, economic uncertainty, mispricing, return predictability, risk premium
Depositing User:	Symplectic Admin
Date Deposited:	07 Dec 2022 09:18
Last Modified:	12 Nov 2023 15:36
DOI:	10.1111/eufm.12403
Open Access URL:	https://doi.org/10.1111/eufm.12403
Related URLs:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3166513