I study the effects of risk and ambiguity (Knightian uncertainty) on optimal portfolios and equilibrium asset prices … ambiguity leads to portfolio inertia and excess volatility. Specifically, when news is surprising, then investors may not react … cash flow news, asset betas, or market risk premia may lead to drastic changes in the stock price and hence to excess …

I study the effects of aversion to risk and ambiguity (uncertainty in the sense of Knight (1921)) on the value of the … negative news may lead to higher valuations of the stock market than idiosyncratic negative events. Aversion to risk and … ambiguity can explain high expected stock market returns and excess volatility and kurtosis of stock market returns. Moreover …

volatility of asset prices: small changes in supplies necessarily lead to a big price response. …