Ambiguity and information tradeoffs

Nihad Aliyev

doi:10.1016/j.jedc.2025.105180

Ambiguity and information tradeoffs

Nihad Aliyev

Department of Applied Finance

Research output: Contribution to journal › Article › peer-review

Abstract

We model investors facing ambiguity about the number of informed traders and characterize equilibrium in both financial and information markets. In the financial market, this ambiguity generates a premium that can be positive or negative, depending on traders' ambiguity attitude. The premium always increases with ambiguity aversion but only increases with ambiguity level when traders are sufficiently ambiguity averse. We show that traders' effective ambiguity aversion increases with the number of informed traders, resulting in a non-monotonic relation between the equity premium and the number of informed traders. In the information market, ambiguity about the number of informed traders emerges endogenously from a range of information acquisition costs.

Original language	English
Article number	105180
Pages (from-to)	1-28
Number of pages	28
Journal	Journal of Economic Dynamics and Control
Volume	179
DOIs	https://doi.org/10.1016/j.jedc.2025.105180
Publication status	Published - Oct 2025

Bibliographical note

© 2025 The Author(s). Published by Elsevier B.V. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

Keywords

Ambiguity
Ambiguity aversion
Equity premium
Information acquisition

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10.1016/j.jedc.2025.105180Licence: CC BY

Publisher version (open access)Final published version, 2.13 MBLicence: CC BY

Cite this

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title = "Ambiguity and information tradeoffs",

abstract = "We model investors facing ambiguity about the number of informed traders and characterize equilibrium in both financial and information markets. In the financial market, this ambiguity generates a premium that can be positive or negative, depending on traders' ambiguity attitude. The premium always increases with ambiguity aversion but only increases with ambiguity level when traders are sufficiently ambiguity averse. We show that traders' effective ambiguity aversion increases with the number of informed traders, resulting in a non-monotonic relation between the equity premium and the number of informed traders. In the information market, ambiguity about the number of informed traders emerges endogenously from a range of information acquisition costs. ",

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PY - 2025/10

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N2 - We model investors facing ambiguity about the number of informed traders and characterize equilibrium in both financial and information markets. In the financial market, this ambiguity generates a premium that can be positive or negative, depending on traders' ambiguity attitude. The premium always increases with ambiguity aversion but only increases with ambiguity level when traders are sufficiently ambiguity averse. We show that traders' effective ambiguity aversion increases with the number of informed traders, resulting in a non-monotonic relation between the equity premium and the number of informed traders. In the information market, ambiguity about the number of informed traders emerges endogenously from a range of information acquisition costs.

AB - We model investors facing ambiguity about the number of informed traders and characterize equilibrium in both financial and information markets. In the financial market, this ambiguity generates a premium that can be positive or negative, depending on traders' ambiguity attitude. The premium always increases with ambiguity aversion but only increases with ambiguity level when traders are sufficiently ambiguity averse. We show that traders' effective ambiguity aversion increases with the number of informed traders, resulting in a non-monotonic relation between the equity premium and the number of informed traders. In the information market, ambiguity about the number of informed traders emerges endogenously from a range of information acquisition costs.

KW - Ambiguity

KW - Ambiguity aversion

KW - Equity premium

KW - Information acquisition

UR - https://www.scopus.com/pages/publications/105016192232

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DO - 10.1016/j.jedc.2025.105180

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EP - 28

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

M1 - 105180

ER -

Ambiguity and information tradeoffs

Abstract

Bibliographical note

Keywords

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