Trading ambiguity : a tale of two heterogeneities ∗ Sujoy Mukerji †

We consider financial markets with heterogeneously ambiguous assets and heterogeneously ambiguity averse investors. Investors’ preferences, a version of the smooth ambiguity model, are a parsimonious extension of the standard mean-variance framework. We consider, in turn, portfolio choice, equilibrium prices, and trade upon arrival of public information, and show, in each case, there are departures from the outcome in standard theory. These departures are of significance as they occur in the direction of empirical regularities that belie the standard theory. ∗We would like to thank the following for their helpful comments: Milo Bianchi, Jürgen Eichberger, Chiaki Hara, Luca Gelsomini, Christian Gollier, Peter Klibanoff, Frank Riedel, Tan Wang, Jan Werner, Kathy Yuan; and seminar participants at the Istanbul Technical University, the European University Institute, the London School of Economics, the Paris School of Economics, the University of Helsinki, the University of Southampton, the ZiF in Bielefeld University, the Toulouse School of Economics, the University of Glasgow, the University of Durham, the 6th international conference in finance and economics in Moscow. Elias Bouacida provided excellent research assistance. Tallon thanks ANR Grants 17-CE26-0003 and 17-EURE-0001. †Queen Mary University of London ‡Koç University Paris School of Economics, CNRS