Signal extraction, ambiguity and asset pricing : an experimental study

• Main Authors: Ho, Jia Jun, Soh, Isabelle Shi Min, Lim, Zhi Xun
• Other Authors: Bao Te
• Format: Final Year Project
• Language: English
• Published: 2019
• Subjects: DRNTU::Social sciences::Economic development
• Online Access: http://hdl.handle.net/10356/76813
• Institution: Nanyang Technological University

Across the past two decades, the world’s stock trading volume has increased nearly five-fold. In Singapore, stock trading volume has increased from US$74.137 billion to US$219.612 billion, amounting to an increment of 196% (World Bank, 2018). Given the increasing scale and pervasiveness of financial trading, it is important to understand market participants’ investment decisions. In the world of financial trading, participants are required to make investment decisions, often while facing ambiguous information regarding fundamental asset values. This paper seeks to investigate the relationship between signal extraction and ambiguity attitudes on financial asset pricing decisions. The analysis concluded that individuals are able to do signal extraction, but fail to do so under ambiguity. Using the Ordinary Least Squares (OLS) method, we also showed that Ambiguity-Averse subjects perceive significantly higher variances compared to Ambiguity-Seeking subjects when faced with identical ambiguous information. The results obtained highlight that ambiguity may be a source of market instability or cause deviation of market prices from rational expectations.