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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/31453

Title: Asset Pricing and Ambiguity: Empirical Evidence
Authors: Brenner, Menachem
Izhakian, Yehuda
Keywords: Ambiguity
Knightian uncertainty
Equity premium
Ambiguity measure
Issue Date: 30-Jan-2012
Abstract: Modern portfolio theory focuses on the relationship between risk and return, assuming away ambiguity, uncertainty over the probability space. This paper assumes that ambiguity affects asset prices and tests the relationship between risk, ambiguity and return based on a model developed by Izhakian (2011). Its contribution is twofold; it proposes an ambiguity measure that is derived theoretically and computed from stock market prices. Second, it uses ambiguity in conjunction with risk to test the basic relationship between risk, ambiguity and return. This paper finds that ambiguity has a consistently negative effect on returns and risk mostly has a positive effect.
URI: http://hdl.handle.net/2451/31453
Appears in Collections:Economics Working Papers

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