The Finance Brown Bag Seminar is held by the Institute for Finance, Banking and Insurance (WU Vienna) and the Vienna Graduate School of Finance (VGSF). It serves as a presentation platform for PhD students, faculty members, and visitors. An overview of BBS on the website of the Institute for Finance, Banking and Insurance.
—————-
Stefan Voigt, University of Copenhagen
Uncertainty everywhere: Integrating conceptual uncertainty in the stochastic discount factor
with Patrick Weiss (Reykjavik University), Gregor Kastner (University of Klagenfurt) and Luis Gruber (University of Klagenfurt)
The estimation of the stochastic discount factor requires to take a stance on model (which risk factors matter?) and estimation uncertainty (what are the parameter values of a given model?). We show that, additionally, conceptual uncertainty – leeway in the construction of said risk factors – is substantial and naturally calls for a Bayesian solution. We propose a Bayesian model averaging procedure to incorporate variation from data preprocessing steps in financial decision making. We find that the Bayesian approach to conceptual uncertainty leads to more accurate estimates of the stochastic discount factor and improved portfolio choice.
