Financial markets with volatility uncertainty
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.
|Date of creation:||Nov 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Postfach 10 01 31, 33501 Bielefeld|
Web page: http://www.imw.uni-bielefeld.de/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:bie:wpaper:441. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bettina Weingarten)
If references are entirely missing, you can add them using this form.