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Coherent-Price Systems and Uncertainty-Neutral Valuation

Research School of Economics, Australian National University, Canberra 2601, Australia
Risks 2019, 7(3), 98; https://doi.org/10.3390/risks7030098
Received: 14 May 2019 / Revised: 28 July 2019 / Accepted: 2 August 2019 / Published: 17 September 2019
(This article belongs to the Special Issue Financial Risks and Regulation)
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. View Full-Text
Keywords: ambiguous volatility; nonlinear expectations and prices; arbitrage; asset pricing; preference-free valuation; martingales ambiguous volatility; nonlinear expectations and prices; arbitrage; asset pricing; preference-free valuation; martingales
MDPI and ACS Style

Beissner, P. Coherent-Price Systems and Uncertainty-Neutral Valuation. Risks 2019, 7, 98.

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