Investors' Behaviors And Asset Pricing Under Knightian Uncertainty

Although it has been more than a decade in the post-financial crisis,the recovering of the global economy is still unstable.There are many potential challenges for the economy,we have not only to prevent the shock of‘Black Swan',but also to concentrate on the cumulative effects of‘Grey Rhinoceros'.How to deal with uncertainty is becoming an important and common issue for every country in the world.As the second largest economy,China has the dual characteristics of emerging economy and transition economy,which bring more challenges and uncertainty for our country.As the main part of uncertainty,Knightian uncertainty plays an important role in financial markets and financial decision making.For both the investors' micro-financial decisions and the government's macro-prudential supervision it is of great significance to extensively explore the Knightian uncertainty and its influence mechanism in Chinese financial market.On the basis on those above,focusing on the Knightian uncertainty of Chinese market and using reasonable measurement,the thesis comprehensively analyses the specific characteristics of Knightian uncertainty in the market,and fully investigates the influence mechanism of Knightian uncertainty on the market and the investors' behaviors with theoretic analysis and empirical models.The contents of the work are listed as follows.Firstly,the characteristics of the Knightian uncertainty in Chinese market are analyzed.It is found that,the Knightian uncertainty is much higher than that in the US market.In the analysis of month effects,Jan.has the highest Knightian uncertainty,Feb.is the second,and the average Knightian uncertainty in March is significantly lower than that in the foregoing two months.These results respectively illustrate the effects of the annual earning announcement,Spring festival,political concerns.The analysis of calendar effect shows that,the Knightian uncertainty on Monday is the highest,and those in the following working days are reduced gradually,which reflects the gradual digestion of the weekend information.In addition,the Knightian uncertainty in the opening market is quiet higher than that in the closing market,reflecting the the Knightian uncertainty by cumulating overnight information plays a significant role in the opening market.Then,the effect of Knightian uncertainty on Chinese market premium is investigated,and the pattern of the attitudes to Knightian uncertainty is explored.It is shown that the premium of Knightian uncertainty is significant while the risk premium is not in the market premium,which marks a new insight on the survey of uncertainty in Chinese market.The interaction of the attitudes to Knightian uncertainty with the probability of favorable returns is inverse- shaped,with a shift from Knightian uncertainty loving to Knightian uncertainty aversion with the increasing of the probability of favorable returns.Comparing with the US market,the degree of Knightian uncertainty loving or aversion is remarkably higher,suggesting the unsophistication of the Chinese investors and a sensitive attitude to Knightian uncertainty.For the attitudes to Knightian uncertainty,Monday and Tuesday effects are insignificant and the effects of the remaining working days are not;the overnight effect is significant in the opening market and not in the closing market.Moreover,it is found that Chinese investors have no preferences of multiple priors expected utility and subjective expected utility.In the next,the necessity of introduction of Knightian uncertainty based pricing factor is checked by the Fama-Macbeth regression.Then,the Knightian uncertainty factor is constructed following the rank-weighting scheme.By the factor,the Fama-French three factors model is extended and a four factors pricing model is formed.The empirical tests show that,the model is valid in Chinese market,and the new factor has significant explanatory power for asset returns.In the end,the cross-sectional and time series effects of Knightian uncertainty on the stock returns are investigated.It is shown that Knightian uncertainty has significantly and robustly negative cross-sectional effect on Chinese stock returns.For the time series effect,a pricing model with expected Knightian uncertainty and unexpected Knightian uncertainty is developed.It is shown that the unexpected Knightian uncertainty has significant effect on the returns while the expected Knightian uncertainty has not.The thesis confirms the different effects of risk and Knightian uncertainty in Chinese market;and uncovers the behavioral pattern of Knightian uncertainty for the investors;and provides asset pricing models based on Knightian uncertainty,and with empirical investigations classifies the explanatory power and influence mechanism of the pricing factor by Knightian uncertainty.The work can provide valuable guidance to mechanism designing of Chinese market,financial supervision and financial stability in China.