Ambiguity and Reality

Item Type Monograph (Working Paper)
Abstract

Model builders face ambiguity about the true data generating process. Consequently, they need to deal with ambiguity attitudes (inside uncertainty) and ambiguous financial reality (outside uncertainty) when developing and estimating financial models. We introduce a novel approach for systematically dealing with outside uncertainty in addition to inside uncertainty in a tractable way. By bounding the effects of ambiguous data features, we avoid the adverse consequences of outside uncertainty, such as strongly biased equity premiums and investment policies. In a real data application, we show that asset managers can be more reliably evaluated using our bounded-influence approach.

Authors Trojani, Fabio; Wiehenkamp, Christian & Wrampelmeyer, Jan
Language English
Keywords Knightian Uncertainty, Model Risk, Ambiguity Aversion, Robust Econometrics, Portfolio Choice, Option Pricing
Subjects business studies
Institute/School s/bf - Swiss Institute of Banking and Finance
HSG Classification contribution to scientific community
Refereed No
Date 2014
Publisher SoF - HSG
Place of Publication St. Gallen
Series Name SoF Working Paper Series
Number 14/18
Depositing User Prof. Dr. Jan Wrampelmeyer
Date Deposited 09 Jan 2015 13:55
Last Modified 23 Aug 2016 11:20
URI: https://www.alexandria.unisg.ch/publications/238358

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Citation

Trojani, Fabio; Wiehenkamp, Christian & Wrampelmeyer, Jan: Ambiguity and Reality. SoF Working Paper Series, 2014, 14/18.

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https://www.alexandria.unisg.ch/id/eprint/238358
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