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Model Uncertainty Effect on Asset Prices
Author(s) -
Jiang Junya,
Tian Weidong
Publication year - 2017
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12118
Subject(s) - econometrics , economics , asset (computer security) , capital asset pricing model , bounded function , sensitivity analysis , model risk , uncertainty analysis , risk management , computer science , mathematics , statistics , computer security , mathematical analysis , management
We develop a weighted‐average approach of pricing under model uncertainty, where several plausible models are considered instead of a perfect one. The model uncertainty effect from this weighted‐average approach is significantly different from the conventional wisdom, in which the true price must be bounded by prices in all plausible models. We identify under what circumstances the model uncertainty effect is significant and reveal serious risk management challenges for researchers, regulators, and market participants.