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

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.