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Professor Menachem Brenner is interviewed by Wall Street Journal

Volatility Is Low But Ambiguity Is Sky High

- Prof Menachem Brenner said ambiguity looks a lot like it did between 2004 and 2006, when the measure was on the rise alongside stocks. The main difference, however, is that ambiguity is a lot higher now.

(original article Wall Street Journal (Dec 11, 2017)


"Two academics are rolling out a new measure of market fear that suggests investors aren’t nearly as complacent as they seem.

The gauge of so-called ambiguity, meant to chronicle the degree of uncertainty investors have in the probabilities they use to make decisions, has been at all-time highs in recent months, indicating that there’s more fear built into the stock market than common measures of volatility suggest. The Cboe Volatility Index, a popular metric for tracking fear in the market, has been idling near record lows this year.

In separating out ambiguity from common measures of risk, Menachem Brenner of New York University and Yehuda Izhakian of Baruch College are picking up on a concept that traces back nearly a century. Economist Frank Knight in 1921 wrote about the difference between risk and uncertainty.

If volatility measures the uncertainties for which one can determine a probability, or the “known unknowns,” ambiguity measures the “unknown unknowns,” to use a term popularized by former Defense Secretary Donald Rumsfeld, according to Mr. Brenner.

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