Dynamically consistent Choquet random walk and real investments
AbstractIn the real investments literature, the investigated cash flow is assumed to follow some known stochastic process (e.g. Brownian motion) and the criterion to decide between investments is the discounted utility of their cash flows. However, for most new investments the investor may be ambiguous about the representation of uncertainty. In order to take such ambiguity into account, we refer to a discounted Choquet expected utility in our model. In such a setting some problems are to dealt with: dynamical consistency, here it is obtained in a recursive model by a weakened version of the axiom. Mimicking the Brownian motion as the limit of a random walk for the investment payoff process, we describe the latter as a binomial tree with capacities instead of exact probabilities on its branches and show what are its properties at the limit. We show that most results in the real investments literature are tractable in this enlarged setting but leave more room to ambiguity as both the mean and the variance of the underlying stochastic process are modified in our ambiguous model
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Date of creation: 2010
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Choquet integrals; conditional Choquet integrals; random walk; Brownian motion; real options; optimal portfolio;
Other versions of this item:
- André Lapied & Robert Kast, 2010. "Dynamically consistent Choquet random walk and real investments," Working Papers 10-21, LAMETA, Universtiy of Montpellier, revised 2010.
- NEP-ALL-2010-11-20 (All new papers)
- NEP-ORE-2010-11-20 (Operations Research)
- NEP-UPT-2010-11-20 (Utility Models & Prospect Theory)
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