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Ambiguity and asset prices: a closer look in an emerging market

Merve G. Cevheroğlu-Açar (Department of Management, Bogazici University, Istanbul, Turkey)
Cenk C. Karahan (Department of Management, Bogazici University, Istanbul, Turkey)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 3 January 2023

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Abstract

Purpose

This study empirically documents the effect of ambiguity on stock returns in a major emerging market along with the ambiguity attitudes under various market conditions.

Design/methodology/approach

Ambiguity is measured as the volatility of return probability distributions extracted from high frequency intraday data via a method developed by Brenner and Izhakian (2018). The impact of ambiguity is then tested on stock market returns.

Findings

The results show that ambiguity is a priced factor in Turkish stock market with a positive premium that is distinct from risk premium. In contrast with the findings in the US market, the investors in Turkey show an increasing level of ambiguity aversion as expected probability of favorable returns deviate from the mean value. The investors are effectively ambiguity neutral in lateral markets. The results are robust to testing with higher moments, sentiment measures and under recession conditions.

Originality/value

This study contributes to empirically documenting ambiguity and ambiguity aversion in a major emerging market along with the opportunity to observe international differences in ambiguity attitudes.

Keywords

Acknowledgements

This study is supported by Bogazici University Research Fund Grant Number 14564.

Citation

Cevheroğlu-Açar, M.G. and Karahan, C.C. (2023), "Ambiguity and asset prices: a closer look in an emerging market", Review of Behavioral Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/RBF-06-2022-0151

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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