Ambiguity, Information Quality, and Asset Pricing




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    • Larry G. Epstein is with the Department of Economics, Boston University. Martin Schneider is with the Department of Economics, NYU and the Federal Reserve Bank of Minneapolis. We are grateful to Robert Stambaugh (the editor) and an anonymous referee for very helpful comments. We also thank Monika Piazzesi, Pietro Veronesi, as well as seminar participants at Cornell, IIES (Stockholm), Minnesota, the Cowles Foundation Conference in honor of David Schmeidler, and the SAMSI workshop on model uncertainty for comments and suggestions. This paper reflects the views of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.


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.