The impact of ambiguity-loving attitude on market participation and asset pricing

Ambiguity-averse attitudes are widely accepted to influence investors' behavior; however, the impact of ambiguity-loving attitudes has yet to be thoroughly investigated. This paper examines the effect of the ambiguity-loving attitude on market participation and asset pricing. We propose a model incorporating investors with an ambiguity-loving attitude, determining that ambiguity-loving individuals have higher allocations in risky assets, crowding out other investors and extending their nonparticipation region. When the market supply is small, ambiguity-loving investors' discontinuous and non-unique demand mapping can cause "flat ranges"in equilibrium prices. When the market supply is moderate or large, increasing the ambiguity level or ambiguity-loving investors' fraction reduces equity premium. With short-sales constraints, the effect of ambiguity-loving investors' attitudes remains unchanged except for their positions and the equity premium. With heterogeneous opinions, a rising ambiguity level or ambiguity-loving investors' fraction increases equity premiums when they only hold short positions.