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.

Viability and Arbitrage Under Knightian Uncertainty / M. Burzoni, F. Riedel, H.M. Soner. - In: ECONOMETRICA. - ISSN 0012-9682. - 89:3(2021), pp. 1207-1234. [10.3982/ECTA16535]

Viability and Arbitrage Under Knightian Uncertainty

M. Burzoni;
2021

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.
Knightian uncertainty; no arbitrage; robust finance; Viability
Settore SECS-S/06 - Metodi mat. dell'economia e Scienze Attuariali e Finanziarie
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/2434/868045
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