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The Risk-Neutral Equivalent Pricing of Model-Uncertainty

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  • Ken Kangda Wren

Abstract

Existing approaches to asset-pricing under model-uncertainty adapt classical utility-maximisation frameworks and seek theoretical comprehensiveness. We move toward practice by considering binary model-uncertainties and by switching attention from 'preference' to 'constraints'. Economic asset-pricing in this setting is found to decompose into the viable pricing of model-risk and of non-model risk separately such that the former has a unique and intuitive risk-neutral equivalent formulation with convenient properties. Its parameter, a dynamically conserved constant of model-risk inference, allows an integrated representation of ex-ante risk-pricing and bias, such that their ex-post price-effects can be disentangled, through well-known price anomalies such as Momentum and Low-Risk.

Suggested Citation

  • Ken Kangda Wren, 2025. "The Risk-Neutral Equivalent Pricing of Model-Uncertainty," Papers 2502.13744, arXiv.org, revised Mar 2025.
    • Handle: RePEc:arx:papers:2502.13744
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