Ambiguous volatility, possibility and utility in continuous time

Larry Epstein and Shaolin Ji

Journal of Mathematical Economics, 2014, vol. 50, issue C, 269-282

Abstract: This paper formulates a model of utility for a continuous time framework that captures the decision-maker’s concern with ambiguity about both the drift and volatility of the driving process. At a technical level, the analysis requires a significant departure from existing continuous time modeling because it cannot be done within a probability space framework. This is because ambiguity about volatility leads invariably to a set of nonequivalent priors, that is, to priors that disagree about which scenarios are possible.

Keywords: Ambiguity; Recursive utility; G-Brownian motion; Undominated measures; Quasisure analysis; Robust stochastic volatility (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (35)

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Working Paper: Ambiguous Volatility, Possibility and Utility in Continuous Time (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:50:y:2014:i:c:p:269-282

DOI: 10.1016/j.jmateco.2013.09.005

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