  Pari-mutuel markets are trading platforms through which the common market
maker simultaneously clears multiple contingent claims markets. This market has
several distinctive properties that began attracting the attention of the
financial industry in the 2000s. For example, the platform aggregates liquidity
from the individual contingent claims market into the common pool while
shielding the market maker from potential financial loss. The contribution of
this paper is two-fold. First, we provide a new economic interpretation of the
market-clearing strategy of a pari-mutuel market that is well known in the
literature. The pari-mutuel auctioneer is shown to be equivalent to the market
maker with extreme ambiguity aversion for the future contingent event. Second,
based on this theoretical understanding, we present a new market-clearing
algorithm called the Knightian Pari-mutuel Mechanism (KPM). The KPM retains
many interesting properties of pari-mutuel markets while explicitly controlling
for the market maker's ambiguity aversion. In addition, the KPM is
computationally efficient in that it is solvable in polynomial time.
