Knightian Uncertainty in Financial Markets: An Assessment

If information is too vague and imprecise to be summarized by a unique additive probability measure, an agent faces Knightian uncertainty or ambiguity rather than risk. Under Knightian uncertainty, an agent's beliefs may be represented by a capacity or a set of additive probabilities. It is proved that an agent's attitude towards ambiguity has a crucial role in asset price determination and portfolio choice. Knightian uncertainty attitude provides an alternative explanation of financial market failures and enables puzzles to be solved, such as market breakdowns, price indeterminacy and volatility, bid and ask spreads, portfolio inertia, violation of call and put parity.
(J.E.L.: D81, G11, G12).     

Managerial Ownership and Corporate Hedging

Abstract:  Using information on 443 UK non-financial companies, this work provides evidence supporting the hypothesis that managerial risk aversion is an incentive to deviate from the optimal hedging position. Conflicts of interest between shareholders and managers are at the centre of the decision about the firm's risk profile but are not relevant as determinants of the decision to hedge. This is rather associated with factors enhancing the firm's expected value (underinvestment, scale economies, tax savings).     

Patient selection in a mixed oligopoly market for health care: the role of the soft budget constraint

Competition in hospital care is often implemented through mixed markets where public and private hospitals compete for patients. The optimality of this market form has long been debated in the literature. In this paper, we investigate the role of soft budget constraint in affecting patient selection within a mixed market. Patient selection is the undesired effect of hospital competition when three conditions are met: asymmetry in hospitals’ objectives, presence of hospital’s private information and inability to enforce hard budget constraint. The paper shows that soft budget is a pre-condition for the existence of patient selection. Our paper adds an important dimension to the existing literature which considers asymmetry of information as the only cause for this market failure. The understanding of the mechanisms leading to patient selection makes it possible for the regulator to design measures to reduce such undesirable effect.     

The role of volume in order book dynamics: a multivariate Hawkes process analysis

We show that multivariate Hawkes processes coupled with the nonparametric estimation procedure first proposed in Bacry and Muzy [IEEE Trans. Inform. Theory, 2016, 62, 2184–2202] can be successfully used to study complex interactions between the time of arrival of orders and their size observed in a limit order book market. We apply this methodology to high-frequency order book data of futures traded at EUREX. Specifically, we demonstrate how this approach is amenable not only to analyse interplay between different order types (market orders, limit orders, cancellations) but also to include other relevant quantities, such as the order size, into the analysis, showing also that simple models assuming the independence between volume and time are not suitable to describe the data.     

Framing adaptive capacity through a history–futures lens: Lessons from the South East Queensland Climate Adaptation Research Initiative

This paper explores how the history–futures interface can inform a set of concrete adaptation options to climate change for stakeholders in South East Queensland, Australia. It is based on research undertaken as part of the Commonwealth funded South East Queensland Climate Adaptation Research Initiative (SEQ-CARI) that profiled 33 historical case studies to identify common themes in the ways societies responded to stress. The case studies are intended to provide a context for thinking about adaptive capacity with stakeholders in the four areas of human settlement and health; energy; agriculture, forestry and fisheries; and ecosystems and biodiversity. The case studies demonstrate that adaptive capacity varies with context and is affected by the complexity, technology, leadership, institutions and imaginative resources inherent to the social system examined. To increase the possibilities for reflection by stakeholders, the case studies were used to create a set of historical scenarios that explore some of the key features of human responses to challenges such as climate change. This paper draws on this work to suggest a set of ‘practical’ lessons for those engaged with climate change today and into the future.