Coherent-Price Systems and Uncertainty-Neutral Valuation

Patrick Beissner
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Patrick Beissner: Research School of Economics, Australian National University, Canberra 2601, Australia

Risks, 2019, vol. 7, issue 3, 1-18

Abstract: This paper considers fundamental questions of arbitrage pricing that arises when the uncertainty model incorporates ambiguity about risk. This additional ambiguity motivates a new principle of risk- and ambiguity-neutral valuation as an extension of the paper by Ross (1976) (Ross, Stephen A. 1976. The arbitrage theory of capital asset pricing. Journal of Economic Theory 13: 341–60). In the spirit of Harrison and Kreps (1979) (Harrison, J. Michael, and David M. Kreps. 1979. Martingales and arbitrage in multiperiod securities markets. Journal of Economic Theory 20: 381–408), the paper establishes a micro-economic foundation of viability in which ambiguity-neutrality imposes a fair-pricing principle via symmetric multiple prior martingales. The resulting equivalent symmetric martingale measure set exists if the uncertain volatility in asset prices is driven by an ambiguous Brownian motion.

Keywords: ambiguous volatility; nonlinear expectations and prices; arbitrage; asset pricing; preference-free valuation; martingales (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:7:y:2019:i:3:p:98-:d:267950

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