Pricing Systematic Ambiguity in Capital Markets

28 Pages Posted: 28 Jul 2012 Last revised: 10 Sep 2013

See all articles by Menachem Brenner

Menachem Brenner

New York University (NYU) - Department of Finance

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: July 2012

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.

Suggested Citation

Brenner, Menachem and Izhakian, Yehuda (Yud), Pricing Systematic Ambiguity in Capital Markets (July 2012). NYU Working Paper No. 2451/31587, Available at SSRN: https://ssrn.com/abstract=2119040

Menachem Brenner (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://people.stern.nyu.edu/yizhakia/

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