Ambiguity-seeking behavior in portfolio choice with ambiguous information

This paper examines the portfolio choices of ambiguity-seeking investors, a group often overlooked in previous studies, and their impact on market equilibrium. We develop a one-period model in which investors observe an ambiguous public signal but are uncertain about the variance of its noise. Unlike ambiguity-averse investors, who exhibit trading inertia in response to greater ambiguity, ambiguity-seeking investors tend to overreact. Their optimal demand for the risky asset is characterized by a set-valued function, where they randomize between overreaction and underreaction in certain scenarios. The equilibrium price responds nonlinearly to the public signal across different signal magnitudes, providing new insights into empirical debates on whether investors overreact or underreact to information under high uncertainty. Furthermore, we analyze investor welfare in a market with heterogeneous investors. The welfare analysis suggests that, under our calibrated parameterization, a larger share of ambiguity-seeking investors or a sufficiently high level of signal ambiguity tends to reduce their ex-ante expected utility, whereas a moderate degree of signal ambiguity may benefit both investor types.