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Pricing Systematic Ambiguity in Capital Markets

Authors: Brenner, Menachem
Izhakian, Yehuda
Issue Date: 26-Jul-2012
Series/Report no.: FIN-12-008
Abstract: Asset pricing models assume that probabilities of future outcomes are known. In reality, however, there is ambiguity with regard to these probabilities. Accounting for ambiguity in asset pricing theory results in a model with two systematic components, beta risk and beta ambiguity. The focus of this paper is to study the empirical implications of ambiguity for the cross section of equity returns. We find that systematic ambiguity is an important determinant of equity returns. We also find that the Fama-French factors contribute to the explanatory power of the two main drivers of returns; namely, systematic risk and systematic ambiguity.
Appears in Collections:Finance Working Papers

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