Knightian Uncertainty and Regulation in Financial Markets

Regulating financial markets is both an essential as well as quite subtle issue for modern societies. We review Value at Risk and how it contributed to the crisis of 2008. The question how to regulate markets is closely related to the issue of Knightian uncertainty. The distinction of „uncertainty" from „risk“ is about to change the way economists think about financial markets and markets under time and uncertainty.

We thus reconsider the microeconomic foundations of financial economics under Knightian Uncertainty. We discuss „better“ risk measures than Value at Risk, but also point to some issues that regulation with these risk measures might face.