Ambiguous Volatility and Asset Pricing in Continuous Time

@article{Epstein2013AmbiguousVA,
  title={Ambiguous Volatility and Asset Pricing in Continuous Time},
  author={Larry G. Epstein and Shaolin Ji},
  journal={Review of Financial Studies},
  year={2013},
  volume={26},
  pages={1740-1786}
}
We formulate a model of utility for a continuous-time framework that captures aversion to ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are presented. First, we derive arbitrage-free pricing rules based on hedging arguments. Because ambiguous volatility implies market incompleteness, hedging arguments determine prices only up to intervals. In order to obtain sharper predictions, we apply the model of utility to a representative… Expand
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