When private information is observed by ambiguity averse investors, asset prices may be
informationally inefficient in rational expectations equilibrium. This inefficiency implies lower
asset prices as uninformed investors require a premium to hold assets and higher return
volatility relative to informationally efficient benchmarks. Moreover, asset returns are
negatively skewed and may be leptokurtic. Inefficiency also leads to amplification in price of
small changes in news, relative to informationally efficient benchmarks. Public information …

Ambiguous private information leads to informational inefficiency of market prices in rational
expectations equilibrium. This inefficiency implies lower asset prices as uninformed traders
require a premium to hold assets. This premium is increasing in the riskiness of the asset
and leads to excess volatility, price swings, and abrupt volatility and illiquidity variation
across informational efficiency regimes. Public information affects the informational
efficiency of price and can also lead to abrupt changes in volatility and illiquidity.