Hedging with small uncertainty aversion (Q503389): Difference between revisions

The paper studies the pricing of contingent claims on stocks that follow a standard diffusion process but in which agents are uncertain about the volatility process and are therefore prone to pricing errors. Uncertainty is accounted for in the agents preferences via a penalty function that penalizes for probability scenarios which are far from a reference one. For small degrees of uncertainty aversion some explicit pricing formulas are obtained.