Article ID: | iaor2013630 |
Volume: | 74 |
Issue: | 2 |
Start Page Number: | 183 |
End Page Number: | 217 |
Publication Date: | Feb 2013 |
Journal: | Theory and Decision |
Authors: | Guidolin Massimo, Rinaldi Francesca |
Keywords: | investment |
We survey the literature that has explored the implications of decision‐making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices. This ambiguity literature has led to a number of significant advances in our ability to rationalize empirical features of asset returns and portfolio decisions, such as the failure of the two‐fund separation theorem in portfolio decisions, the modest exposure to risky securities observed for a majority of investors, the home equity preference in international portfolio diversification, the excess volatility of asset returns, the equity premium and the risk‐free rate puzzles, and the occurrence of trading break‐downs.