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Econometrica Vol. 89 No. 3 2021

Viability and Arbitrage Under Knightian Uncertainty

Matteo Burzoni1; Frank Riedel2,3; H. Mete Soner4

1 Department of Mathematics, Università degli studi di Milano · 2 Center for Mathematical Economics, Bielefeld University · 3 School of Economics, College of Business and Economics, University of Johannesburg · 4 Department of Operations Research and Financial Engineering, Princeton University

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.

DOI
10.3982/ecta16535
Volume
89
Issue
3
Pages
1207-1234
Language
en
Sources
bibtex:phds-export.bib crossref

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