allows the pari-mutuel market to better mitigate counterparty risk. 8 Second, the auction performs better than other trading platforms, particularly in a low-liquidity environment. The auction aggregates liquidity dispersed in multiple individual markets into the common pool. Lastly, having the common market maker in multiple markets improves price effi- ciency (Lange and Economide, 2005). Please see the Appendix for further details. The KPM is expected to be useful for options markets in which delta hedging the market maker’s inventory is not feasible. 9 The KPM solves an optimization that is robust to worst-case scenarios. In particular, Corollary 1 shows that the KPM can become almost completely pari-mutuel when the value of Ω is very large. If the market is completely pari-mutuel, the market maker does not lose any money regardless of what happens at maturity. Therefore, the inability to delta hedge the inventory becomes less critical. There are two specific options markets for which delta hedging may be particularly infeasible. The first example is options for which the underlying asset is not tradable (e.g., the market for economic derivatives written on U.S. non-farm payrolls) (Baron and Lange, 2007). The second example is options with extremely short time to maturity because the delta fluctuates too much (Baron and Lange, 2007). In this paper, we first show that the market-clearing strategy of the Convex Pari-mutuel Call Auction Mechanism (CCPAM) is asymptotically equivalent to that of the market maker with extreme ambiguity aversion for the future contingent event. Because the CPCAM is closely related to other notable pari-mutuel auctions in the literature, we regard this conclusion as a basis for arguing that pari-mutuel auctions are closely related to ambiguity aversion. With this understanding, we design a new market for trading contingent claims, the Knightian Pari-mutuel Mechanism (KPM). The main optimization problem of the KPM is what the market maker should solve if he/she adheres to the theory of decision making under ambiguity aversion. The algorithm clears the market while controlling for the market maker’s level of risk and ambiguity $^{8}$Duffie and Zhu (2011) show that counterparty risk can be better managed if the same CCP is involved in more than one market. $^{9}$Baron and Lange (2007) also argue that the PDCA is suitable for markets where delta hedging is difficult. 6.3 Potential Areas of Application 7 Conclusion 30