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Monetary Valuation Of Cash Flows Under Knightian Uncertainty

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  • HANS FÖLLMER

    ()
    (Humboldt-Universität zu Berlin, Institut für Mathematik, Unter den Linden 6, 10099 Berlin, Germany)

  • IRINA PENNER

    ()
    (Humboldt-Universität zu Berlin, Institut für Mathematik, Unter den Linden 6, 10099 Berlin, Germany)

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    Abstract

    The classical valuation of an uncertain cash flow in discrete time consists in taking the expectation of the sum of the discounted future payoffs under a fixed probability measure, which is assumed to be known. Here we discuss the valuation problem in the context of Knightian uncertainty. Using results from the theory of convex risk measures, but without assuming the existence of a global reference measure, we derive a robust representation of concave valuations with an infinite time horizon, which specifies the interplay between model uncertainty and uncertainty about the time value of money.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 14 (2011)
    Issue (Month): 01 ()
    Pages: 1-15

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    Handle: RePEc:wsi:ijtafx:v:14:y:2011:i:01:p:1-15

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    Related research

    Keywords: Cash flows; dynamic convex risk measures; concave monetary valuations; Knightian uncertainty; robust representation; model ambiguity; discounting ambiguity; bubbles;

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    Cited by:
    1. Beatrice Acciaio & Hans Föllmer & Irina Penner, 2012. "Risk assessment for uncertain cash flows: model ambiguity, discounting ambiguity, and the role of bubbles," LSE Research Online Documents on Economics 50118, London School of Economics and Political Science, LSE Library.
    2. Beatrice Acciaio & Hans Föllmer & Irina Penner, 2012. "Risk assessment for uncertain cash flows: model ambiguity, discounting ambiguity, and the role of bubbles," Finance and Stochastics, Springer, vol. 16(4), pages 669-709, October.

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