Together with my Ph.D. students David and Sinan, we have written an article for the second edition of the International Conference on European Integration and Sustainable Development.
During financial crises, market participants are pressurized and presumably prone to emotional biased decisions. We use the Economic Policy Uncertainty Indicator and Dow Jones Industrial Average as well as Nikkei 225 GARCH volatilities to test for ambiguity aversion and selective perception of investors. For most crises, we find a significant link between uncertainty and market volatility. However, with respect to ambiguity aversion, the causality differs between crises indicating that investors may not always be driven by uncertainty. Regarding selective perception, we find significant results for the Dot.Com and subprime crises, but not for the Japanese asset price bubble and the Asian crisis.
Peter Scholz, David Großmann & Sinan Krückeberg (2017): Better The Devil You Know Than The Devil You Don’t — Financial Crises between Ambiguity Aversion and Selective Perception. SSRN Working Paper.