Higher-order uncertainty in financial markets: evidence from a consensus pricing service

Ergun, Lerby and Uthemann, Andreas (2020) Higher-order uncertainty in financial markets: evidence from a consensus pricing service. Systemic Risk Centre Discussion Papers (98). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

We assess the ability of an information aggregation mechanism that operates in the over-the-counter market for financial derivatives to reduce valuation uncertainty among market participants. The analysis is based on a unique dataset of price estimates for S&P 500 index options that major financial institutions provide to a consensus pricing service. We consider two dimensions of uncertainty: uncertainty about fundamental asset values and strategic uncertainty about competitors' valuations. Through structural estimation, we obtain empirical measures of fundamental and strategic uncertainty that are based on market participants' posterior beliefs. We show that the main contribution of the consensus pricing service is to reduce its subscribers' uncertainty about competitors' valuations.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.systemicrisk.ac.uk/
Additional Information:	© 2020 The Author(s)
Divisions:	Systemic Risk Centre
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C59 - Other D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Date Deposited:	13 Jun 2023 14:48
Last Modified:	16 Sep 2023 00:00
URI:	http://eprints.lse.ac.uk/id/eprint/118893

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