The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes | Zendy

Roman Frydman | Zendy; Søren Johansen | Zendy; Anders Rahbek | Zendy; Morten Nyboe Tabor | Zendy

Open Access

The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes

Author(s) -

Roman Frydman,

Søren Johansen,

Anders Rahbek,

Morten Nyboe Tabor

Publication year - 2019

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.3346766

Subject(s) - knightian uncertainty , constraint (computer aided design) , aggregate (composite) , econometrics , consistency (knowledge bases) , economics , computer science , mathematics , ambiguity , artificial intelligence , geometry , materials science , composite material , programming language

This paper introduces the Knightian Uncertainty Hypothesis (KUH), a new approach to macroeconomics and finance theory. KUH rests on a novel mathematical framework that characterizes both measurable and Knightian uncertainty about economic outcomes. Relying on this framework and John Muth’s pathbreaking hypothesis, KUH represents participants’ forecasts to be consistent with both uncertainties. KUH thus enables models of aggregate outcomes that:

1) are premised on market participants’ rationality, and

2) yet accord a role to both fundamental and psychological (and other non-fundamental) factors in driving outcomes.

The paper also suggests how a KUH model’s quantitative predictions can be confronted with time series data.

The content you want is available to Zendy users.

Already have an account? Click here to sign in.

Having issues? You can contact us here

Accelerating Research