Higher-Order Uncertainty in Financial Markets: Evidence from a Consensus Pricing Service

55 Pages Posted: 4 Mar 2020

See all articles by Lerby Murat Ergun

Lerby Murat Ergun

Bank of Canada; London School of Economics & Political Science (LSE)

Andreas Uthemann

London School of Economics & Political Science (LSE) - Systemic Risk Centre; Bank of Canada

Date Written: February 6, 2020

Abstract

We assess the ability of an information aggregation mechanism that operates in the over-the-counter market for financial derivatives to reduce valuation uncertainty among market participants. The analysis is based on a unique dataset of price estimates for S&P 500 index options that major financial institutions provide to a consensus pricing service. We consider two dimensions of uncertainty: uncertainty about fundamental asset values and strategic uncertainty about competitors' valuations. Through structural estimation, we obtain empirical measures of fundamental and strategic uncertainty that are based on market participants’ posterior beliefs. We show that the main contribution of the consensus pricing service is to reduce its subscribers' uncertainty about competitors' valuations.

Keywords: OTC markets, information aggregation, social learning, strategic uncertainty, consensus pricing, benchmarks

JEL Classification: C58, D53, D83, G12, G14

Suggested Citation

Ergun, Lerby Murat and Uthemann, Andreas, Higher-Order Uncertainty in Financial Markets: Evidence from a Consensus Pricing Service (February 6, 2020). Available at SSRN: https://ssrn.com/abstract=3533518 or http://dx.doi.org/10.2139/ssrn.3533518

Lerby Murat Ergun

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Andreas Uthemann (Contact Author)

London School of Economics & Political Science (LSE) - Systemic Risk Centre ( email )

Houghton St
London
United Kingdom

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

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