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Viability and Arbitrage Under Knightian Uncertainty
Author(s) -
Burzoni Matteo,
Riedel Frank,
Soner H. Mete
Publication year - 2021
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta16535
Subject(s) - knightian uncertainty , fundamental theorem of asset pricing , economics , arbitrage , probabilistic logic , arbitrage pricing theory , ex ante , order (exchange) , equivalence (formal languages) , mathematical economics , capital asset pricing model , sublinear function , investment theory , asset (computer security) , financial market , financial economics , econometrics , mathematics , finance , computer science , mathematical analysis , statistics , ambiguity , computer security , discrete mathematics , macroeconomics , programming language
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.