Price as a choice under nonstochastic randomness in finance

Yaroslav Ivanenko and Munier. B

Working papers from Banque de France

Abstract: Arrow-Debreu state preference approach to derivatives pricing is embedded into decision theoretical framework. Derivatives prices are considered as decision variables. Axiomatic decision theory, concerned with the attitude toward uncertainty and existence of closed in *-weak topology sets of finitely-additive probabilities is applied. A version of indifference pricing relation is obtained that extends classical relations for European contingent claims. The obtained structure happens to be a convenient way of addressing such traditional problems of mathematical finance as derivatives valuation in incomplete markets, portfolio choice and market microstructure modeling. An alternative interpretation of the closed sets of finitely-additive probabilities as statistical laws of statistically unstable (nonstochastic) random phenomena is discussed.

Keywords: Statistical instability; Randomness; Finitely-additive measures; Decision theory; Uncertainty profiling; Derivatives Valuation; Portfolio choice; Bid-Ask Spread. (search for similar items in EconPapers)
JEL-codes: C18 C44 D81 G02 G11 G13 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:381

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