Risk, ambiguity, and diversification

Attitudes toward risk influence the decision to diversify among uncertain options. Yet, because in most situations the options are ambiguous, attitudes toward ambiguity may also play an important role. I conduct a laboratory experiment to investigate the effect of ambiguity on the decision to diversify. I find that diversification is more prevalent and more persistent under ambiguity than under risk. Moreover, excess diversification under ambiguity is driven by participants who stick with a status quo gamble when diversification among gambles is not feasible. This behavioral pattern cannot be accommodated by major theories of choice under ambiguity.

Credit spreads and monetary policy in a small open economy: an analysis of the colombian economy

This paper estimates Bejarano and Charry (2014)’s small open economy with financial frictions model for the Colombian economy using Bayesian estimation techniques. Additionally, I compute the welfare gains of implementing an optimal response to credit spreads into an augmented Taylor rule. The main result is that a reaction to credit spreads does not imply significant welfare gains unless the economic disturbances increases its volatility, like the disruption implied by a financial crisis. Otherwise its impact over the macroeconomic variables is null.