Models can be wrong and recognizing their limitations is important in economic decision making. While model uncertainty and robustness have been widely applied in engineering and operations research, its introduction in economics is much more recent. Making financial decisions robust calls for applying worst case scenarios and accounting for multiple decision makers who may have conflicting views. We propose projects that deal with model uncertainty for long-horizon financial decisions, requiring dynamic models that may change over time and are always subject to uncertainty. The projects aim at developing methods to provide a credible set of models to use in robust decision making and to study their impact on economic and financial decision making, risk management and valuation of financial assets. Both Bayesian and frequentist econometric methods need to be adapted to allow the simultaneous use of multiple possible models, none of which is necessarily true nor considered to be valid by economic agents. In asset pricing, model uncertainty has implications for the valuation of derivatives and long-dated contracts. In such situations the value of an asset is not unique but falls in a range, requiring extensions of standard pricing methods. We study the effect of uncertainty both from the perspective of a model user or policy maker, and from the perspective of the agents whose behavior is being modeled. Empirical work will help to establish the performance of robust policies in various circumstances. Robust behavior by economic agents also has testable implications for volatility and expected returns on financial markets.

In response to high-profile financial reporting scandals, one of the most profound changes in audit regulation of the past decade is the instalment of public oversight of the auditing profession. The objective is to ensure trust in the financial markets and enhance investor protection and the public interest. Motivated by the debate on the effectiveness of public oversight, which is not uncontested, and the paucity of empirical evidence, the proposed research investigates economic consequences of public oversight and specifically the impact of disclosure of inspection outcomes on information asymmetry and the cost of capital in the equity and debt market.