EURO 2024 Copenhagen
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1401. On the measure of ambiguity on financial markets

Invited abstract in session MC-51: Quantitative methods for systemic and climate risk, stream Risk management in finance.

Monday, 12:30-14:00
Room: M5 (building: 101)

Authors (first author is the speaker)

1. hachmi ben ameur
Finance, INSEEC Business School
2. Zied Ftiti
Quantitative Methods, EDC Paris Business School
3. Wael Louhichi
Finance, ESSCA
4. Jean-Luc Prigent
ThEMA, University of Cergy-Pontoise

Abstract

The impact of ambiguity on financial markets continues to be a debated topic. Like most decisions in life, we face ambiguity, which is the uncertainty about true probabilities. However, this aspect of uncertainty is often overlooked, despite its widespread presence in financial markets and the significant impact it can have. A prime example of extreme ambiguity is a financial crisis, where substantial uncertainty arises and investor behavior is markedly influenced. Therefore, understanding the influence of ambiguity on financial markets is crucial.
This paper introduces two fundamental statistical tools for measuring ambiguity in financial data: the Wasserstein metric and the Kullback-Leibler divergence. These tools assess how close or distant probability distributions are from an expected probability distribution. These criteria are particularly useful for measuring ambiguity during financial crises, especially in multi-dimensional cases.
We conduct empirical analysis using major financial indices, such as the S&P 500, Nikkei 225, Eurostoxx 600, and DXY index, covering the period from January 2000 to December 2022. The findings have significant practical and operational implications for portfolio allocation. It is crucial to consider uncertainty regarding the true values of financial parameters when determining the optimal portfolio profile

Keywords

Status: accepted

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