On the Observational Implications of Knightian Uncertainty

Kevin Hassett and Weifeng Zhong

MPRA Paper from University Library of Munich, Germany

Abstract: We develop a model of a prediction market with ambiguity and derive testable implications of the presence of Knightian uncertainty. Our model can explain two commonly observed empirical regularities in betting markets: the tendency for longshots to win less often than odds would indicate and the tendency for favorites to win more often. Using historical data from Intrade, we further present empirical evidence that is consistent with the predicted presence of Knightian uncertainty. Our evidence also suggests that, even with information acquisition, the Knightian uncertainty of the world may be not "learnable" to the traders in prediction markets.

Keywords: ambiguity; Knightian uncertainty; prediction market; maxmin preferences (search for similar items in EconPapers)
JEL-codes: C53 D81 G13 (search for similar items in EconPapers)
Date: 2017-10-03
New Economics Papers: this item is included in nep-upt
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https://mpra.ub.uni-muenchen.de/82998/1/MPRA_paper_82998.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/85233/9/MPRA_paper_85233.pdf revised version (application/pdf)

Related works:
Journal Article: On the Observational Implications of Knightian Uncertainty (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:82998

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