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Ambiguity, High Frequency Data and Asset Prices

Cenk C. Karahan
Ph.D.
Cenk C. Karahan, Boğaziçi Üniversitesi İşletme Bölümü’nde Finans alanında Yardımcı Doçent olarak görev yapmaktadır. Dr. Karahan Endüstri ve Sistem Mühendisliği alanındaki lisans ile Sinema-Televizyon ve İşletme yandal derecelerini University of Southern California’dan almıştır. Ardından aynı üniversitenin Endüstri ve Sistem Mühendisliği bölümünde finans mühendisliği alanındaki araştırmasıyla doktora derecesini almaya hak kazanmıştır. Dr. Karahan’ın araştırma ve öğretim ilgi alanları arasında niceliksel finans, varlık fiyatlama, davranışsal finans ve eğlence ekonomisi gibi konular bulunmaktadır.
In decision-making theory, ambiguity is different from risk such that ambiguity corresponds to the situations that the probability distribution of the relevant events is unknown while risk corresponds to the situations that a (subjective or objective) unique probability distribution exists and known by the investors. In this setting, ambiguity aversion is defined as the escape behavior of ambiguous situations. In classical finance models, investors are assumed to know their utility preferences in the each state and maximize their subjective expected utility (SEU) accordingly. This assumption removes away the Knightian distinction between risk and ambiguity, making the uncertainty equals only to risk. Therefore, modern portfolio theories mainly examine the relationship between risk and return. However, in reality the investors do not know the precise probability distributions and they expose to not only risk but also ambiguity. Although the theoretical studies recently start including the ambiguity in the asset pricing models, the empirical studies are very limited in number due to the lack of sound methodology of measuring the ambiguity aversion. This study takes the practical ambiguity measure proposed by Brenner and Izhakian (2018) to a new level of practical application in testing it in Turkish stock market that offers abundant intraday data. We examine the relationship between the ambiguity and the asset returns using this novel empirical method on both market-wide level and cross-section of stock returns. Our preliminary results show that ambiguity premium is distinct from risk premium with a positive and significant magnitude. Exposure to the ambiguity differs in cross-section of stocks across characteristics like size, value, coverage, industry etc.

EMBA 102
Kasım 11, 2019 - 13:00