Ambiguity aversion and stock market participation: an empirical analysis
Harris, Richard D. F.
Journal of Banking and Finance
Stock market participation is very low, with approximately two thirds of all U.S. households not owning any public equity. This is a puzzle in the context of the basic Expected Utility model. One explanation put forward in the literature is that stock market participation is low because, in addition to risk, stocks also entail ambiguity and investors are ambiguity averse. We empirically test this hypothesis, measuring stock market participation using equity fund flows and ambiguity with dispersion in analyst forecasts about aggregate market returns. In a multivariate framework our results show that increases in ambiguity are significantly and negatively related to equity fund flows, and thus support the notion that limited market participation is related to ambiguity aversion.
NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Banking & Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published online in Journal of Banking & Finance
Vol. 58, pp. 57-70