Ambiguous Information, Risk Aversion, and Asset Pricing

Previous studies have shown that investor preference for positive skewness creates a potential premium on negatively skewed assets. In this paper, we attempt to explore the connection between investors’ skewness preferences and corresponding demand for a risk premium on asset returns. Using data from the Japanese stock market, we empirically study the significance of risk aversion with skewness preference that potentially delivers a premium. Compared to studies on other stock markets, our finding suggests that Japanese investors exhibit preference for positively skewed assets, but do not display dislike for ones that are negatively skewed. This implies that investors from different countries having dissimilar attitudes toward risk may possess different preferences toward positive skewness, which would result in a different magnitude of expected risk premium on negatively skewed assets.

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Information asymmetry and stock returns

Journal of Advances in Management Research ◽

10.1108/jamr-05-2020-0084 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Anshi Goel ◽

Vanita Tripathi ◽

Megha Agarwal

Keyword(s):

Asset Pricing ◽

Information Asymmetry ◽

Stock Returns ◽

Content Type ◽

Information Risk ◽

Portfolio Returns ◽

Expected Stock Returns ◽

Fama And French ◽

The Relationship ◽

Three Factor

PurposeThis study endeavours to examine the relationship between information asymmetry and expected stock returns at the National Stock Exchange (NSE) of India, with a sample of NIFTY 500 stocks for a period ranging from 1st April 2000 to 31st March 2018, by employing three different proxies of information asymmetry: number of transactions, institutional ownership and idiosyncratic volatility.Design/methodology/approachThe return differential amongst information-sorted decile portfolios has been assessed to understand the effect of information risk on stock returns by employing (1) traditional measures of performance evaluation like mean, Sharpe, Treynor and information ratios, (2) regression models like the capital asset pricing (CAPM), Fama and French three-factor, Carhart's four-factor, information-augmented CAPM, information-augmented Fama and French three-factor and information-augmented Carhart's four-factor models and (3) an autoregressive distributed lag (ARDL) model.FindingsThe empirical evidence indicated that as information asymmetry associated with portfolio increases, returns also expand to recompense investors for bearing information risk validating the existence of a significant positive relationship between information asymmetry and expected stock returns at the NSE. Amongst the various asset pricing models employed in this study, the information-augmented Fama and French three-factor model turned out to be the best in explaining cross-sectional variations in portfolio returns.Research limitations/implicationsStrong information premium was observed such that high information stocks outperformed low information stocks which have strong inference for investors and portfolio managers, who all continuously look out for investment strategies that can lend hand to beat the market.Originality/valueEasley and O'Hara (2004) proposed that stocks with more information asymmetry have higher expected returns. Very few studies have examined this relationship between information risk and stock returns that too restricted to the US market only, with a few on other emerging markets. No work has been conducted on the concerned issue in the Indian context. Therefore, it seems to be the first study to explore the relationship between information asymmetry and expected stock returns in the Indian securities market.

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Asset Pricing with Horizon-Dependent Risk Aversion

SSRN Electronic Journal ◽

10.2139/ssrn.2535919 ◽

2014 ◽

Cited By ~ 13

Author(s):

Marianne Andries ◽

Thomas M. Eisenbach ◽

Martin C. Schmalz

Keyword(s):

Asset Pricing ◽

Risk Aversion

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Dynamic General Equilibrium and T-Period Fund Separation

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109010000049 ◽

2010 ◽

Vol 45 (2) ◽

pp. 369-400 ◽

Cited By ~ 2

Author(s):

Anke Gerber ◽

Thorsten Hens ◽

Peter Woehrmann

Keyword(s):

Asset Pricing ◽

Risk Aversion ◽

General Equilibrium ◽

Asset Allocation ◽

Mutual Fund ◽

Asset Prices ◽

Dynamic General Equilibrium ◽

Discount Factors ◽

Equilibrium Asset Pricing ◽

Mutual Fund Separation

AbstractIn a dynamic general equilibrium model, we derive conditions for a mutual fund separation property by which the savings decision is separated from the asset allocation decision. With logarithmic utility functions, this separation holds for any heterogeneity in discount factors, while the generalization to constant relative risk aversion holds only for homogeneous discount factors but allows for any heterogeneity in endowments. The logarithmic case provides a general equilibrium foundation for the growth-optimal portfolio literature. Both cases yield equilibrium asset pricing formulas that allow for investor heterogeneity, in which the return process is endogenous and asset prices are determined by expected discounted relative dividends. Our results have simple asset pricing implications for the time series as well as the cross section of relative asset prices. It is found that on data from the Dow Jones Industrial Average, a risk aversion smaller than in the logarithmic case fits best.

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