31 January: Francesco Rocciolo (QSMS Seminar)

Presenting “Arbitrage Pricing under Uncertainty and the Measurement of Ambiguity from Financial Asset Prices” at 12:15-13:30 in QA406.


On 31 January  2020, we have Francesco Rocciolo of University of Reding visiting us. He is going to give a seminar titled “The effects of connectivity and centralization of financial networks on their exposure to
default contagion at 12:15-13:30 in room A406 in Building Q, Budapest University of Technology and Economics, Faculty of Economic and Social Sciences, Magyar tudósok körútja 2, 1117 Budapest. Sandwiches will be provided. Please help the organisers by registering in advance at egervari.zsuzsanna@qsms.bme.hu Registration is free.
Also, see our Facebook event.

Abstract: The measurement of Knightian uncertainty is crucial to understand most of the phenomena that have characterized financial markets in recent times. This paper derives an asset pricing theory under uncertainty based on the no-arbitrage principle. By assuming the pricing factors of a sequence of assets are characterized by uncertainty in probability distributions, I prove the conditions for the existence of both a systematic and an idiosyncratic ambiguity premium. The presence of the latter is justified by the incomplete diversifiability of ambiguity through combinations of the assets in a portfolio. Furthermore, the theory leads to an ambiguity measure based on the no-arbitrage principle which is sharply separated from agents’ attitude towards uncertainty. This no-arbitrage ambiguity index is then estimated empirically for the following regions: North America, Europe, Japan, and Asia Pacific (excluding Japan) and compared to other popular measures in recent literature. The results show that the measure is well founded theoretically and characterized by a pattern consistent with historical events traditionally interpreted as sources of uncertainty. It is also more informative than other existing measures with respect to the detection of fluctuations in overall economic uncertainty.