MONETARY VALUATION OF CASH FLOWS UNDER KNIGHTIAN UNCERTAINTY

Hans Föllmer and Irina Penner
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Hans Föllmer: Humboldt-Universitä zu Berlin, Institut für Mathematik, Unter den Linden 6, 10099 Berlin, Germany
Irina Penner: Humboldt-Universitä zu Berlin, Institut für Mathematik, Unter den Linden 6, 10099 Berlin, Germany

Chapter 10 in Finance at Fields, 2012, pp 249-263 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe classical valuation of an uncertain cash flow in discrete time consists in taking the expectation of the sum of the discounted future payoffs under a fixed probability measure, which is assumed to be known. Here we discuss the valuation problem in the context of Knightian uncertainty. Using results from the theory of convex risk measures, but without assuming the existence of a global reference measure, we derive a robust representation of concave valuations with an infinite time horizon, which specifies the interplay between model uncertainty and uncertainty about the time value of money.

Keywords: Mathematical Finance; Financial Mathematics; Risk Management; Asset Pricing; Computational Finance; Derivatives; Option Pricing; Portfolio Optimization (search for similar items in EconPapers)
Date: 2012
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