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Glosten L. R., Jagannathan R., and Runkle D.E., 1993. On the relation between the expected value of the volatility of the nominal excess return on stocks, The Journal of Finance, 48(5), 1779-1801.

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Article

Market Ambiguity and Returns

1Finance Department, Southeast Missouri State University, Cape Girardeau, USA

2Marketing Department, Southern Illinois University, Carbondale, USA


Journal of Finance and Economics. 2025, Vol. 13 No. 3, 101-111
DOI: 10.12691/jfe-13-3-3
Copyright © 2025 Science and Education Publishing

Cite this paper:
Frederick Adjei, Mavis Adjei. Market Ambiguity and Returns. Journal of Finance and Economics. 2025; 13(3):101-111. doi: 10.12691/jfe-13-3-3.

Correspondence to: Frederick  Adjei, Finance Department, Southeast Missouri State University, Cape Girardeau, USA. Email: fadjei@semo.edu

Abstract

Using a GARCH-M model, we examine the effect of the level of ambiguity in the stock market on the conditional mean of market returns. Additionally, we investigate the predictive power of the level of ambiguity expected market returns. The results of the GARCH-M estimation indicate the presence of GARCH effects and show a positive risk-return tradeoff. Second, we find that the level of ambiguity, although orthogonal to risk, is correlated with market returns. On dividing our study period into expansion and recession subperiods, we find that there is an inverse relationship between the level of ambiguity and contemporaneous market returns only during recessions. Finally, the results of the forecast models indicate that the level of ambiguity is a strong predictor of future market returns. Specifically, our findings offer the first definite evidence of a positive relationship between the level of ambiguity and future market returns.

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