Does ambiguity matter? Estimating asset pricing models with a multiple-priors recursive utility

Jeong, Daehee; Kim, Hwagyun; Park, Joon‐Young

doi:10.1016/j.jfineco.2014.10.003

Cited by 53 publications

(8 citation statements)

References 45 publications

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“…They found that investors demand higher returns when facing uncertainty or ambiguity, and that the effect is stronger for ambiguity. In addition, Jeong, Kim, and Park () have confirmed that ambiguity makes investors demand a high premium for possible losses not characterized by a probability distribution. Ambiguity aversion was also isolated empirically from the efficient valuation with delayed information.…”

Section: Redeployability Ambiguity and Resource Undervaluationmentioning

confidence: 94%

Stock market undervaluation of resource redeployability

Sakhartov

2018

Strategic Management Journal

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Research Summary: Stock market undervaluation of resources was often assumed to have strategic implications. Such undervaluation lets firms buy resources relatively cheaply, but it can also constrain resource deployment. This article shows that the option to redeploy a firm's resources to a new business can be undervalued in stock markets when investors face ambiguity about that option due to uniqueness of redeployment. The developed formal model derives conditions under which stock markets undervalue resources. Those conditions are summarized with an empirical operationalization that can be tested with a broad range of strategic implications. Besides, the model provides a more complete account of resource redeployability by demonstrating the redeployability paradox. The paradox highlights that some determinants of redeployability enhance undervaluation, while simultaneously increasing objective value of redeployable resources. Managerial Summary: Stock markets can systematically undervalue resources. On the one hand, such undervaluation creates a profitable opportunity for a firm that needs some resources for its growth and compares the option to buy stock in another firm, whose resource are undervalued, with the option to build those resources internally. On the other hand, such undervaluation poses limits to resource deployment strategies of the undervalued firm. When does such undervaluation occur? This study highlights one possible source for undervaluation, ambiguity that is faced by stock market investors about the option to redeploy a firm's resources to a new business. The study specifies conditions under which stock markets are more likely to undervalue resources. The understanding of those conditions can guide managers toward strategic opportunities.

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Section: Redeployability Ambiguity and Resource Undervaluationmentioning

confidence: 94%

Stock market undervaluation of resource redeployability

Sakhartov

2018

Strategic Management Journal

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“…They assume that the equity premium in asset pricing theory contains both a risk and an ambiguity premium. Jeong et al ( 2015 ) develop a method for separately measuring premiums for risks and ambiguity. They apply this method to the S&P 500 index and confirm that investors pay an ambiguity premium.…”

Section: Evidencementioning

confidence: 99%

Ambiguity aversion: bibliometric analysis and literature review of the last 60 years

2021

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We conduct a bibliometric analysis and review the literature of the last six decades on ambiguity aversion. Comparing trends in theoretical, experimental, and empirical contributions, our study presents the main aspects that are discussed in this literature. We show the increasing relevance of ambiguity aversion for decision-making research and discuss factors influencing attitudes on ambiguity. Our literature review reveals unsolved problems in the research on ambiguity and gives an outlook on new ventures for future research.

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“…3 Marquering and Verbeek (2004) have been cited by numerous manuscripts, for example, Neely et al (2014), Paye (2012), Paye and Timmermann (2006), Rapach et al (2010), andRime et al (2010). 4 A nonexhaustive list of manuscripts on asset pricing is Adrian et al (2015), Berk and van Binsbergen (2016), Chib et al (2020), Fama (2014), Fama and French (2012, Ghosh et al (2017), Sinha (2006, 2008), Jegadeesh et al (2019), Jeong et al (2015), Kan and Robotti (2008), Kelly and Ljungqvist (2012), Kim and Skoulakis (2018), Kleibergen and Zhan (2020), Lee et al (2009), Lettau and Pelger (2020), Shih et al (2014), Fama and French (1993), among many others.…”

Section: Acknowledgmentsmentioning

confidence: 99%

The reliability of geometric Brownian motion forecasts of S&P500 index values

Sinha

2021

Journal of Forecasting

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This manuscript extends the literature on the application of geometric Brownian motion. Forecasted drift and diffusion terms estimated separately and recursively are plugged into the framework to forecast S&P500 index values. Expected index values are estimated from 100,000 simulated index values and probabilities. The results of comparing expected index values with actual values indicate that although reliable predictions of S&P500 index values can be obtained at monthly, quarterly, and annual frequencies, the reliability may decrease in that order.

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Does ambiguity matter? Estimating asset pricing models with a multiple-priors recursive utility

Cited by 53 publications

References 45 publications

Stock market undervaluation of resource redeployability

Stock market undervaluation of resource redeployability

Ambiguity aversion: bibliometric analysis and literature review of the last 60 years

The reliability of geometric Brownian motion forecasts of S&P500 index values

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