Ambiguity Aversion and Incompleteness of Financial Markets
Résumé
It is widely thought that incomes risks can be shared by trading in
financial assets. But financial assets typically carry some risk
idiosyncratic to them, hence, disposing incomes risk using financial assets
will involve buying into the inherent idiosyncratic risk. However, standard
theory argues that diversification would reduce the inconvenience of
idiosyncratic risk to arbitrarily low levels. This argument is less robust
than what standard theory leads us to believe: ambiguity aversion can
exacerbate the tension between the two kinds of risks to the point that
classes of agents may not want to trade some financial assets. Thus,
theoretically, the effect of ambiguity aversion on financial markets is to
make the risk sharing opportunities offered by financial markets less
complete than it would be otherwise.
financial assets. But financial assets typically carry some risk
idiosyncratic to them, hence, disposing incomes risk using financial assets
will involve buying into the inherent idiosyncratic risk. However, standard
theory argues that diversification would reduce the inconvenience of
idiosyncratic risk to arbitrarily low levels. This argument is less robust
than what standard theory leads us to believe: ambiguity aversion can
exacerbate the tension between the two kinds of risks to the point that
classes of agents may not want to trade some financial assets. Thus,
theoretically, the effect of ambiguity aversion on financial markets is to
make the risk sharing opportunities offered by financial markets less
complete than it would be otherwise.
Domaines
Economies et finances
Origine :
Fichiers produits par l'(les) auteur(s)
Loading...