UNCERTAINTY

Financial Decision Making under Multi-Dimentional Uncertainty

Coordinatore	TEL AVIV UNIVERSITY    more  Organization address address: RAMAT AVIV city: TEL AVIV postcode: 69978 contact info Titolo: Ms. Nome: Lea Cognome: Pais Email: send email Telefono: 972-3-6408774 Fax: -6408728
Nazionalità Coordinatore	Israel [IL]
Totale costo	232˙315 €
EC contributo	232˙315 €
Programma	FP7-PEOPLE Specific programme "People" implementing the Seventh Framework Programme of the European Community for research, technological development and demonstration activities (2007 to 2013)
Code Call	FP7-PEOPLE-2009-IOF
Funding Scheme	MC-IOF
Anno di inizio	2010
Periodo (anno-mese-giorno)	2010-08-01   -   2013-07-31

 Partecipanti

#	participant	country	role	EC contrib. [€]
1	TEL AVIV UNIVERSITY  Organization address address: RAMAT AVIV city: TEL AVIV postcode: 69978 contact info Titolo: Ms. Nome: Lea Cognome: Pais Email: send email Telefono: 972-3-6408774 Fax: -6408728	IL (TEL AVIV)	coordinator	232˙315.90

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 Obiettivo del progetto (Objective)

'During the recent decade it has become commonly agreeable that existing financial models cannot explain many observable phenomena in the financial world (e.g. the recent mortgage crisis and its worldwide effects, equity premium puzzle and home bias in investing). One flaw of the existing models is that they do not capture the entire picture of uncertainty. This research generalizes models of asset pricing to accommodate additional tier of uncertainty, called ambiguity. Namely, we model financial decision making in a more realistic manner by dropping the standard and restrictive assumption that economic agents know the precise odds of possible events and their accurate monetary outcomes. We formulate financial decision making under multi-dimensional uncertainty using the novel mathematical framework of phantom probability, introduced by Izhakian and Izhakian (2009). This proposal addresses a series of fundamental questions about the nature of ambiguity: How optimal portfolio composition is affected by ambiguity? Whether ambiguity leads to greater savings compared to the standard risk formulations. When do ambiguity and risk reinforce (counteract) each other? How can the level of ambiguity be measured? Can ambiguity be eliminated or reduced by diversification in a manner similar to idiosyncratic risk in the CAPM framework? The effect of ambiguity in an intertemporal framework is highly related to implication of the term structure of interest rate and option pricing. Accommodating ambiguity to option and term structure models can explain some deviations from Black-Scholes pricing formula (e.g. the option “smile”, under pricing and risk-free rate puzzle) and might also produce more realistic term structure model. This research project is supervised by Prof. Thomas Sargent, Prof. Simon Benninga and Prof. Itzhak Gilboa. The outgoing phase will take place at New York University and the return phase will take place at Tel Aviv University.'