Higher-order uncertainty in financial markets: evidence from a consensus pricing service

We assess the ability of an information aggregation mechanism that operates in the over-the-counter market for financial derivatives to reduce valuation uncertainty among market participants. The analysis is based on a unique dataset of price estimates for S&P 500 index options that major financial institutions provide to a consensus pricing service. We consider two dimensions of uncertainty: uncertainty about fundamental asset values and strategic uncertainty about competitors' valuations. Through structural estimation, we obtain empirical measures of fundamental and strategic uncertainty that are based on market participants' posterior beliefs. We show that the main contribution of the consensus pricing service is to reduce its subscribers' uncertainty about competitors' valuations.