Dynamically Consistent α-Maxmin Expected Utility

Beißner P, Lin Q, Riedel F (2020)
Mathematical Finance 30(3): 1073-1102.

Zeitschriftenaufsatz | Veröffentlicht | Englisch
 
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Abstract / Bemerkung
The alpha-maxmin model is a prominent example of preferences under Knightian uncertainty as it allows to distinguish ambiguity and ambiguity attitude. These preferences are dynamically inconsistent for nontrivial versions of alpha. In this paper, we derive a recursive, dynamically consistent version of the alpha-maxmin model. In the continuous-time limit, the resulting dynamic utility function can be represented as a convex mixture between worst and best case, but now at the local, infinitesimal level. We study the properties of the utility function and provide an Arrow-Pratt approximation of the static and dynamic certainty equivalent. We then derive a consumption-based capital asset pricing formula and study the implications for derivative valuation under indifference pricing.
Stichworte
Alpha-maxmin expected utility; ambiguity attitude; dynamic consistency; Knightian uncertainty
Erscheinungsjahr
2020
Zeitschriftentitel
Mathematical Finance
Band
30
Ausgabe
3
Seite(n)
1073-1102
ISSN
0960-1627
eISSN
1467-9965
Page URI
https://pub.uni-bielefeld.de/record/2939436

Zitieren

Beißner P, Lin Q, Riedel F. Dynamically Consistent α-Maxmin Expected Utility. Mathematical Finance. 2020;30(3):1073-1102.
Beißner, P., Lin, Q., & Riedel, F. (2020). Dynamically Consistent α-Maxmin Expected Utility. Mathematical Finance, 30(3), 1073-1102. doi:10.1111/mafi.12232
Beißner, P., Lin, Q., and Riedel, F. (2020). Dynamically Consistent α-Maxmin Expected Utility. Mathematical Finance 30, 1073-1102.
Beißner, P., Lin, Q., & Riedel, F., 2020. Dynamically Consistent α-Maxmin Expected Utility. Mathematical Finance, 30(3), p 1073-1102.
P. Beißner, Q. Lin, and F. Riedel, “Dynamically Consistent α-Maxmin Expected Utility”, Mathematical Finance, vol. 30, 2020, pp. 1073-1102.
Beißner, P., Lin, Q., Riedel, F.: Dynamically Consistent α-Maxmin Expected Utility. Mathematical Finance. 30, 1073-1102 (2020).
Beißner, Patrick, Lin, Qian, and Riedel, Frank. “Dynamically Consistent α-Maxmin Expected Utility”. Mathematical Finance 30.3 (2020): 1073-1102.

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