The paper investigates how the degree of ambiguity and risk aversion affect excess volatility in asset markets. Assuming that uninformed traders have multiple beliefs about asset payoff in the model of Grossman and Stiglitz (1980), we analyze asset market equilibrium under asymmetric information. We show that both risk aversion and ambiguity play important roles of explaining excess volatility in asset market equilibrium.
Keywords: asymmetric information; ambiguity; risk aversion; excess volatility
