Ambiguous Volatility, Possibility and Utility in Continuous Time

Abstract

This paper formulates a model of utility for a continuous time framework that captures the decision-maker's concern with ambiguity about both the drift and volatility of the driving process. At a technical level, the analysis requires a significant departure from existing continuous time modeling because it cannot be done within a probability space framework. This is because ambiguity about volatility leads invariably to a set of nonequivalent priors, that is, to priors that disagree about which scenarios are possible.

39 pages

References in corpus (2)

• A theoretical framework for the pricing of contingent claims in the presence of model uncertainty
• Random G-expectations

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