{"title":"Economic Uncertainty: Mispricing and Ambiguity Premium","authors":"Semih Kerestecioğlu, Xi Fu, Charlie X. Cai","doi":"10.2139/ssrn.3655670","DOIUrl":null,"url":null,"abstract":"We study the effect of economic uncertainty exposure (EUE) on cross-sectional return differentiating the mispricing from ambiguity-premium effects. Conditional on a common mispricing index, we find that EUE induces disagreement which amplifies mispricing. The highest EUE quintile produces an annualized mispricing alpha of 9%, more than double the unconditional mispricing effect. An ambiguity premium of 4.2% alpha is documented in the “non-mispricing” quintile. The EUE induced mispricing effect is different from existing limits of arbitrage explanations, such as idiosyncratic risk. The ambiguity premium is a new source of the risk premium that is robust to the latest risk models.","PeriodicalId":8731,"journal":{"name":"Behavioral & Experimental Finance eJournal","volume":"103 1","pages":""},"PeriodicalIF":0.0000,"publicationDate":"2020-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"2","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Behavioral & Experimental Finance eJournal","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.3655670","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 2
Abstract
We study the effect of economic uncertainty exposure (EUE) on cross-sectional return differentiating the mispricing from ambiguity-premium effects. Conditional on a common mispricing index, we find that EUE induces disagreement which amplifies mispricing. The highest EUE quintile produces an annualized mispricing alpha of 9%, more than double the unconditional mispricing effect. An ambiguity premium of 4.2% alpha is documented in the “non-mispricing” quintile. The EUE induced mispricing effect is different from existing limits of arbitrage explanations, such as idiosyncratic risk. The ambiguity premium is a new source of the risk premium that is robust to the latest risk models.
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