Abstract
Theoretical models of portfolio choice that incorporate ambiguity predict that investors’ propensity to invest in equities is reduced when ambiguity in the stock market increases. Although this hypothesis stems from the extant theoretical literature, there is no empirical work examining whether it is supported in the data. We test this hypothesis, measuring participation using equity fund flows and ambiguity with dispersion in analyst forecasts about aggregate returns. Our results confirm this hypothesis, as we show that, controlling for other factors that affect flows, increases in ambiguity are associated with outflows from equity funds. Moreover, using data from the Survey of Consumer Finances, we find that increases in ambiguity significantly reduce the likelihood that the average household invests in equities.
Original language | English |
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Pages (from-to) | 57-70 |
Number of pages | 14 |
Journal | Journal of Banking and Finance |
Volume | 58 |
Early online date | 27 Apr 2015 |
DOIs | |
Publication status | Published - 1 Sept 2015 |
Keywords
- stock market participation
- ambiguity aversion
- fund flows
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Professor Richard D F Harris
- School of Accounting and Finance - Business School - Professor of Finance
Person: Academic