Asset Pricing and Ambiguity: Empirical Evidence
New York University (NYU) - Department of Finance
Yehuda (Yud) Izhakian
New York University (NYU) - Leonard N. Stern School of Business
December 22, 2011
NYU Working Paper No.
Modern portfolio theory focuses on the relationship between risk andreturn, assuming away ambiguity, uncertainty over the probability space.This paper assumes that ambiguity affects asset prices and tests therelationship between risk, ambiguity and return based on a modeldeveloped by Izhakian (2011). Its contribution is twofold; it proposesan ambiguity measure that is derived theoretically and computed fromstock market prices. Second, it uses ambiguity in conjunction with riskto test the basic relationship between risk, ambiguity and return. Thispaper finds that ambiguity has a consistently negative effect on returnsand risk mostly has a positive effect.
Number of Pages in PDF File: 37
Keywords: Ambiguity, Knightian uncertainty, Equity premium, Ambiguity measureworking papers series
Date posted: January 31, 2012 ; Last revised: February 14, 2012
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