Working Papers

  • Ambiguity and the Cross Section of Stock Returns (with M. G. Cevheroğlu-Açar)
    We examine the effect of ambiguity exposure on the cross-section of stock returns in the US equity market. In order to quantify ambiguity, we use a recently-developed methodology that measures ambiguity by perturbations in uncertain probabilities, and aversion to ambiguity by aversion to mean-preserving spreads in these probabilities. We find that there is a left-skewed U-shape association between ambiguity exposure and expected returns. More specifically, results show that expected returns increase as absolute ambiguity exposure increases but the absolute effect of the positive exposure is larger than the absolute effect of negative exposure. U-shape trend is essentially the same when controlling for widely known cross-sectional predictors, other ambiguity proxies, different holding and formation periods, and different states of the economy and financial markets. Overall, our results provide substantial empirical evidence that indicates that ambiguity is priced in stock returns. Further tests show that fundamental features like cash flow variance, intangible returns, ad expenses among others might be the channel of influence shaping the stock returns' idiosyncratic ambiguity, hence their relationship with the uncertainty in the market.
     
  • Index Futures Mispricing and Ambiguity (with H. Bahcivan)
    Present paper empirically unveils the effect of having multiple priors on mispricing in the market where mean-variance optimization and Bayesian approach do not have any say. We show that the level of mispricing in S&P500 E-Mini futures contracts is also linked to the degree of prevailing market ambiguity. Crucial findings are in order. First, our study unearths how different levels of Knightian uncertainty impact the direction and level of mispricing in US futures markets. Second, profound analysis reveals asymmetric outlook for episodes of market euphoria and unrest. Third, we identify the primary channels through which the ambiguity permeates the market. Findings are robust to different ambiguity measurement techniques. Extant literature on marred prospects and market implications rests heavily on experimental data. This study expands thin ambiguity literature utilizing real market data.
     
  • Investigation of the Trade Durations with Autoregressive Conditional Duration Model: Evidence from Borsa Istanbul (with Ü. A. Baran)
    This paper investigates duration dynamics in Borsa  ̇Istanbul (BIST) stock exchange via Autoregressive Conditional Duration (ACD) model applied on time observed between consecutive trades. Investigation of a suitable error term specification reveals that Weibull ACD (WACD) model is the most appropriate choice of distribution. Applying WACD model on ten most widely traded stocks in the market documents cross sectional differences in the trade duration dynamics, where the level of duration clustering differs even among the most liquid stocks in the market. The duration dynamics in Borsa  ̇Istanbul are shown to be closer to developing market examples in market microstructure and intraday liquidity rather than the developed market ones.