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A simple robust asset pricing model under statistical ambiguity

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  • Luis García-Feijóo
  • Ariel M. Viale

Abstract

We derive a simple robust single-factor market model under statistical ambiguity that uses relative entropy as the ambiguity index constraining the multiple priors set. We also discuss theoretically the validity of relative entropy to measure model discrepancy and detect misspecification. The premium on both risk and ambiguity in our model would set a bound on stock prices that investors can use as a ‘margin of safety’ against extreme market events.

Suggested Citation

  • Luis García-Feijóo & Ariel M. Viale, 2022. "A simple robust asset pricing model under statistical ambiguity," Quantitative Finance, Taylor & Francis Journals, vol. 22(5), pages 861-869, May.
    • Handle: RePEc:taf:quantf:v:22:y:2022:i:5:p:861-869
    DOI: 10.1080/14697688.2021.2020887
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