A risk-neutral equilibrium leading to uncertain volatility pricing

Johannes Muhle-Karbe () and Marcel Nutz ()
Additional contact information
Johannes Muhle-Karbe: Carnegie Mellon University
Marcel Nutz: Columbia University

Finance and Stochastics, 2018, vol. 22, issue 2, No 2, 295 pages

Abstract: Abstract We study the formation of derivative prices in an equilibrium between risk-neutral agents with heterogeneous beliefs about the dynamics of the underlying. Under the condition that short-selling is limited, we prove the existence of a unique equilibrium price and show that it incorporates the speculative value of possibly reselling the derivative. This value typically leads to a bubble; that is, the price exceeds the autonomous valuation of any given agent. Mathematically, the equilibrium price operator is of the same nonlinear form that is obtained in single-agent settings with worst-case aversion against model uncertainty. Thus, our equilibrium leads to a novel interpretation of this price.

Keywords: Heterogeneous beliefs; Equilibrium; Derivative price bubble; Uncertain volatility model; Nonlinear expectation; 91B51; 91G20; 93E20 (search for similar items in EconPapers)
JEL-codes: D52 D53 G12 G13 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://link.springer.com/10.1007/s00780-018-0356-8 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:finsto:v:22:y:2018:i:2:d:10.1007_s00780-018-0356-8

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-018-0356-8

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().