The Risk-Neutral Equivalent Pricing of Model-Uncertainty

Ken Kangda Wren

Papers from arXiv.org

Abstract: Existing works on asset-pricing under model-risk seek to adapt the utility-preference framework to generate prices that replicate the key anomalies of long-run historical data. We move the focus closer to practice by taking a bottom-up perspective and a Risk Neutral Equivalent approach. Viable model-risk pricing is shown to have a 'canonical' form, with an intuitive price-of-risk and dynamic. It allows the ex-post effect of bias and risk-pricing to be disentangled without the usual joint-hypothesis problem. As a result novel connections are made between a disparate group of subjects: Momentum, Low-Risk, Status Quo Bias and Bewley's Inertia Axiom under Knightian uncertainty.

Date: 2025-02, Revised 2026-10
New Economics Papers: this item is included in nep-upt
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