A risk-neutral equilibrium leading to uncertain volatility pricing
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Publication:1709602
DOI10.1007/S00780-018-0356-8zbMATH Open1422.91716arXiv1612.09152OpenAlexW2563263223WikidataQ130158577 ScholiaQ130158577MaRDI QIDQ1709602FDOQ1709602
Authors: Johannes Muhle-Karbe, Marcel Nutz 
Publication date: 6 April 2018
Published in: Finance and Stochastics (Search for Journal in Brave)
Abstract: We study the formation of derivative prices in equilibrium between risk-neutral agents with heterogeneous beliefs about the dynamics of the underlying. Under the condition that the derivative cannot be shorted, we prove the existence of a unique equilibrium price and show that it incorporates the speculative value of possibly reselling the derivative. This value typically leads to a bubble; that is, the price exceeds the autonomous valuation of any given agent. Mathematically, the equilibrium price operator is of the same nonlinear form that is obtained in single-agent settings with strong aversion against model uncertainty. Thus, our equilibrium leads to a novel interpretation of this price.
Full work available at URL: https://arxiv.org/abs/1612.09152
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equilibriumuncertain volatility modelnonlinear expectationheterogeneous beliefsderivative price bubble
Derivative securities (option pricing, hedging, etc.) (91G20) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Martingales with continuous parameter (60G44) Applications of stochastic analysis (to PDEs, etc.) (60H30)
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- Affine models with path-dependence under parameter uncertainty and their application in finance
- Uncertain volatility models with stochastic bounds
- Conditions for bubbles to arise under heterogeneous beliefs
- Social Optima in Mean Field Linear-Quadratic-Gaussian Control with Volatility Uncertainty
- Uncertain volatility and the risk-free synthesis of derivatives
- A multiperiod equilibrium pricing model
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