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Ambiguity and Reality

Listed author(s):
  • Trojani, Fabio

    ()

  • Wiehenkamp, Christian

    ()

  • Wrampelmeyer, Jan

    ()

Model builders face ambiguity about the true data generating process. Consequently, they need to deal with ambiguity attitudes (inside uncertainty) and ambiguous financial reality (outside uncertainty) when developing and estimating financial models. We introduce a novel approach for systematically dealing with outside uncertainty in addition to inside uncertainty in a tractable way. By bounding the effects of ambiguous data features, we avoid the adverse consequences of outside uncertainty, such as strongly biased equity premiums and investment policies. In a real data application, we show that asset managers can be more reliably evaluated using our bounded-influence approach.

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File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1418.pdf
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Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1418.

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Length: 61 pages
Date of creation: Dec 2014
Handle: RePEc:usg:sfwpfi:2014:18
Contact details of provider: Phone: +41 71 243 40 11
Fax: +41 71 243 40 40
Web page: http://www.unisg.ch/de/universitaet/schools/finance

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