Financial markets with volatility uncertainty
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Publication:406259
DOI10.1016/J.JMATECO.2014.05.008zbMATH Open1305.91232arXiv1012.1535OpenAlexW2257767690MaRDI QIDQ406259FDOQ406259
Authors: Jörg Vorbrink 
Publication date: 8 September 2014
Published in: Journal of Mathematical Economics (Search for Journal in Brave)
Abstract: We investigate financial markets under model risk caused by uncertain volatilities. For this purpose we consider a financial market that features volatility uncertainty. To have a mathematical consistent framework we use the notion of G-expectation and its corresponding G-Brownian motion recently introduced by Peng (2007). Our financial market consists of a riskless asset and a risky stock with price process modeled by a geometric G-Brownian motion. We adapt the notion of arbitrage to this more complex situation and consider stock price dynamics which exclude arbitrage opportunities. Due to volatility uncertainty the market is not complete any more. We establish the interval of no-arbitrage prices for general European contingent claims and deduce explicit results in a Markovian setting.
Full work available at URL: https://arxiv.org/abs/1012.1535
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incomplete marketsvolatility uncertainty\(G\)-Brownian motion stochastic calculuspricing of contingent claims
Derivative securities (option pricing, hedging, etc.) (91G20) Applications of stochastic analysis (to PDEs, etc.) (60H30) Microeconomic theory (price theory and economic markets) (91B24) Actuarial science and mathematical finance (91G99)
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