Template-Type: ReDIF-Paper 1.0
Author-Name: John Griffin
Author-X-Name-First: John
Author-X-Name-Last: Griffin
Author-Workplace-Name: U.S. Department of Defense
Title: Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset
Abstract: Objectives: I examine risk premia and the influence of Knightian uncertainty in a laboratory market featuring a long-lived asset. Methods:  I employ an experimental asset market, utilizing features which are designed to forestall bubbles and crashes. I alter the riskiness of the asset from market to market along two dimensions— expected variance and upside/downside potential. Furthermore, I include a treatment which introduces uncertainty with respect to the expected value of the asset. Results: Bubbles and crashes are absent. Positive, statistically significant risk premia emerge. The risk premia are not sensitive to expected variance, but do vary positively with the magnitude of potential loss. The introduction of Knightian uncertainty does not appear to influence market prices, however it does increase trading volume. Conclusions: When speculative activity is tempered, risk aversion is manifest in market prices. Subjects appear to view risk in the context of potential loss rather than volatility. Return premia for uncertainty are absent, suggesting a lack of uncertainty aversion. Increased trading activity in the presence of uncertainty may be due to differing opinions with regards to the value of the asset or to divergent levels of uncertainty aversion.
Creation-Date: 2015
File-URL: https://archive.fordham.edu/ECONOMICS_RESEARCH/PAPERS/dp2015_01_griffin.pdf
File-Format: Application/pdf
Classification-JEL: C92, D81, D83, G11, G12
Keywords: Risk Premia, Risk Aversion, Loss Aversion, Ambiguity, Uncertainty
Handle: RePEc:FRD:wpaper:DP2015-01er:DP2015-01