This paper develops a micro-founded general equilibrium model of the financial system composed of ultimate borrowers, ultimate lenders and financial intermediaries. The model is used to investigate the impact ofuncertainty about the likelihood of governmental bailouts on leverage,interest rates,...

Assuming that probabilities (capacities) of events are random, this paper introduces a novel model of decision making under ambiguity, called Shadow probability theory, a generalization of the Choquet expected utility. In this model, probabilities of observable events in a subordinated...

This paper develops a micro-founded general equilibrium model of the financial system composed of ultimate borrowers, ultimate lenders and financial intermediaries. The model is used to investigate the impact of uncertainty about the likelihood of governmental bailouts on leverage, interest...

With a focus on risk, classical portfolio theory assumes that probabilities of future outcomes are known. In reality, however, there is ambiguity in these probabilities. This paper studies the nature of the relationship between risk and ambiguity and proves that in most cases ambiguity cannot be...

Asset pricing models assume that probabilities of future outcomes are known. In reality, however, there is ambiguity with regard to these probabilities. Accounting for ambiguity in asset pricing theory results in a model with two systematic components, beta risk and beta ambiguity. The focus of...

With a focus on risk, classical portfolio theory assumes that probabilities of future outcomes are known. In reality, however, there is ambiguity in these probabilities. This paper studies the nature of the relationship between risk and ambiguity and proves that in most cases ambiguity cannot be...

This paper generalizes the mean–variance preferences to mean–variance–ambiguity preferences by relaxing the standard assumption that probabilities are known and assuming that probabilities are themselves random. It introduces a new measure of uncertainty, one that consolidates risk and...

There are two phenomena in behavioral finance and economics which are seemingly unrelated and have been studied separately; overconfidence and ambiguity aversion. In this paper we are trying to link these two phenomena providing a theoretical foundation supported by evidence from an experimental...

This paper develops a micro-founded general equilibrium model of the financial system composed of ultimate borrowers, ultimate lenders and financial intermediaries. The model is used to investigate the impact of uncertainty about the likelihood of governmental bailouts on leverage, interest...

We explore the implications of ambiguity for the pricing of credit default swaps (CDSs). A model of heterogeneous investors with independent preferences for ambiguity and risk shows that, since CDS contracts are assets in zero net supply, the net credit risk exposure of the marginal investor...