Theoretical models predict that ambiguity is an asset pricing factor in addition to risk, however few of them have been tested in the real market. This thesis tests one of the hypotheses that, investors’ propensity to invest in stocks is reduced when ambiguity in the marketplace increases. The hypothesis is tested by using equity fund flows and households’ equity holding as measurements of the market participation, and using dispersion in analysts’ forecasts about aggregate returns as measurement of ambiguity. The results confirm this hypothesis, since the increases in ambiguity are significantly and negatively related to equity fund flows, as well as the likelihood that the average household invests in equities. Moreover, the results also find that the fund flows in non-dividend paying stocks are more sensitive to the changes in ambiguity, and investors transfer capital from the equity market into more liquid asset classes during high-ambiguity periods. In addition, this thesis also tests whether there is heterogeneity in individuals’ ambiguity aversion, and examines the psychological roots of ambiguity aversion. FNE theory explains ambiguity aversion as the result of fearing negative evaluation from others. It predicts that married households are more ambiguity averse; while households with higher income and education, or households that are more mature, are less ambiguity averse. On the other hand, self-evaluation theory explains ambiguity aversion as the result of minimizing anticipated regret. It predicts that households that are more optimistic, or have less income, are less ambiguity averse; while households that have negative market experience, or have higher income, are more ambiguity averse. The results show that married households, or households with high income / negative market experience, are more ambiguity averse; and households that are more optimistic / more mature, are less ambiguity averse. Therefore, both theories have successful predictions, suggesting that the ambiguity aversion is the combined result of the two motivations.

The purpose of this empirical research is to evaluate the relationship between credit constraints and household risky assets in China. The life-cycle hypothesis theory and household portfolio choice theory is the basis of the research. Using a probit model, we find out that credit constraints do not have a clear impact on the probability of households to hold risky assets. Furthermore, the coefficients between age and risky assets are non-linear. Households in urban regions have a high positive coefficient with risky assets. As for now, the literature is missing theories on the relationship between credit constraints and household financial risky assets in China. Thus, this study will enrich the literature of household financial assets allocation by using a questionnaire survey from CHFS (China Household Finance Survey).

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