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.
Programme(s)
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
Topic(s)
Calls for proposals are divided into topics. A topic defines a specific subject or area for which applicants can submit proposals. The description of a topic comprises its specific scope and the expected impact of the funded project.
Calls for proposals are divided into topics. A topic defines a specific subject or area for which applicants can submit proposals. The description of a topic comprises its specific scope and the expected impact of the funded project.
Call for proposal
Procedure for inviting applicants to submit project proposals, with the aim of receiving EU funding.
Procedure for inviting applicants to submit project proposals, with the aim of receiving EU funding.
FP7-PEOPLE-2009-IOF
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Funding Scheme
Funding scheme (or “Type of Action”) inside a programme with common features. It specifies: the scope of what is funded; the reimbursement rate; specific evaluation criteria to qualify for funding; and the use of simplified forms of costs like lump sums.
Funding scheme (or “Type of Action”) inside a programme with common features. It specifies: the scope of what is funded; the reimbursement rate; specific evaluation criteria to qualify for funding; and the use of simplified forms of costs like lump sums.
Coordinator
69978 Tel Aviv
Israel
The total costs incurred by this organisation to participate in the project, including direct and indirect costs. This amount is a subset of the overall project budget.