Viability and arbitrage under Knightian uncertainty

DOI10.3982/ECTA16535MaRDI QIDQ5860136zbMATH OpenOpenAlexFDO

Authors Matteo Burzoni, Frank Riedel, H. Mete Soner

Publication date 18 November 2021

Published in Econometrica (Search for Journal in Brave)

Copyright license Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

Full work available at URL https://arxiv.org/abs/1707.03335

zbMATH Keywords

Knightian uncertaintyviabilityno arbitragerobust finance

Mathematics Subject Classification ID

Financial markets (91G15) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: We reconsider the microeconomic foundations of financial economics. Motivated by the importance of Knightian Uncertainty in markets, we present a model that does not carry any probabilistic structure ex ante, yet is based on a common order. We derive the fundamental equivalence of economic viability of asset prices and absence of arbitrage. We also obtain a modified version of the Fundamental Theorem of Asset Pricing using the notion of sublinear pricing measures. Different versions of the Efficient Market Hypothesis are related to the assumptions one is willing to impose on the common order.

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