The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes
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The Knightian Uncertainty Hypothesis : Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes. / Frydman, Roman; Johansen, Søren; Rahbek, Anders; Tabor, Morten Nyboe.
2019.Research output: Working paper › Research
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TY - UNPB
T1 - The Knightian Uncertainty Hypothesis
T2 - Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes
AU - Frydman, Roman
AU - Johansen, Søren
AU - Rahbek, Anders
AU - Tabor, Morten Nyboe
PY - 2019/3/15
Y1 - 2019/3/15
N2 - This paper proposes the Knightian Uncertainty Hypothesis (KUH), a new approach to macroeconomics and finance theory. KUH rests on a novel mathematical framework that characterizes both measurable and Knightian uncertainty about economic outcomes. Relying on this framework and Muth’s pathbreaking hypothesis, KUH represents participants’ forecasts to be consistent with both uncertainties. KUH thus enables models of aggregate outcomes that 1) are premised on market participants’ rationality, and 2) accord a role to both fundamental and psychological (and other non-fundamental) factors in driving outcomes. The paper also suggests how a KUH model’s quantitative predictions can be confronted with time-series data.
AB - This paper proposes the Knightian Uncertainty Hypothesis (KUH), a new approach to macroeconomics and finance theory. KUH rests on a novel mathematical framework that characterizes both measurable and Knightian uncertainty about economic outcomes. Relying on this framework and Muth’s pathbreaking hypothesis, KUH represents participants’ forecasts to be consistent with both uncertainties. KUH thus enables models of aggregate outcomes that 1) are premised on market participants’ rationality, and 2) accord a role to both fundamental and psychological (and other non-fundamental) factors in driving outcomes. The paper also suggests how a KUH model’s quantitative predictions can be confronted with time-series data.
KW - Faculty of Social Sciences
KW - Unforeseeable Change
KW - Knightian Uncertainty
KW - Muth’s Hypothesis
KW - Model Ambiguity
KW - REH
KW - Behavioral Finance
U2 - 10.2139/ssrn.3341203
DO - 10.2139/ssrn.3341203
M3 - Working paper
T3 - University of Copenhagen. Institute of Economics. Discussion Papers (Online)
BT - The Knightian Uncertainty Hypothesis
ER -
ID: 215683697