The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes
Research output: Working paper › Research
This paper proposes the Knightian Uncertainty Hypothesis (KUH), a new approach to macroeconomics and finance theory. KUH rests on a novel mathematical framework that characterizes both measurable and Knightian uncertainty about economic outcomes. Relying on this framework and Muth’s pathbreaking hypothesis, KUH represents participants’ forecasts to be consistent with both uncertainties. KUH thus enables models of aggregate outcomes that 1) are premised on market participants’ rationality, and 2) accord a role to both fundamental and psychological (and other non-fundamental) factors in driving outcomes. The paper also suggests how a KUH model’s quantitative predictions can be confronted with time-series data.
|Number of pages||55|
|Publication status||Published - 15 Mar 2019|
|Series||University of Copenhagen. Institute of Economics. Discussion Papers (Online)|
- Faculty of Social Sciences - Unforeseeable Change, Knightian Uncertainty, Muth’s Hypothesis, Model Ambiguity, REH, Behavioral Finance