Ambiguity Aversion and Incompleteness of Financial Markets

International audienceIt is widely thought that incomes risks can be shared by trading in<br />financial assets. But financial assets typically carry some risk<br />idiosyncratic to them, hence, disposing incomes risk using financial assets<br />will involve buying into the inherent idiosyncratic risk. However, standard<br />theory argues that diversification would reduce the inconvenience of<br />idiosyncratic risk to arbitrarily low levels. This argument is less robust<br />than what standard theory leads us to believe: ambiguity aversion can<br />exacerbate the tension between the two kinds of risks to the point that<br />classes of agents may not want to trade some financial assets. Thus,<br />theoretically, the effect of ambiguity aversion on financial markets is to<br />make the risk sharing opportunities offered by financial markets less<br />complete than it would be otherwise