Ambiguous Volatility, Possibility and Utility in Continuous Time

2011/03/08 by Larry G. Epstein, Epstein, Larry, Shaolin Ji +1 · 3 citations
Decision Sciences · Economics, Econometrics and Finance · #60H30 #Advanced Statistical Process Monitoring #Capital Investment and Risk Analysis #FOS: Economics and business #FOS: Mathematics #Forecasting Techniques and Applications #General Finance (q-fin.GN) #Probability (math.PR)

paper · pdf · doi:10.48550/arxiv.1103.1652

openalex publication_date 2011/03/08 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

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.

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