Viability and arbitrage under Knightian uncertainty

DOI10.3982/ECTA16535zbMATH Open1475.91371arXiv1707.03335OpenAlexW3157182153MaRDI QIDQ5860136FDOQ5860136

Authors: Matteo Burzoni, Frank Riedel, H. Mete Soner 

Publication date: 18 November 2021

Published in: Econometrica (Search for Journal in Brave)

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.

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

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zbMATH Keywords

Knightian uncertaintyviabilityno arbitragerobust finance

Mathematics Subject Classification ID

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

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