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Risk assessment for uncertain cash flows: model ambiguity, discounting ambiguity, and the role of bubbles

Acciaio, Beatrice, Föllmer, Hans and Penner, Irina (2012) Risk assessment for uncertain cash flows: model ambiguity, discounting ambiguity, and the role of bubbles. Finance and Stochastics, 16 (4). pp. 669-709. ISSN 0949-2984

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Abstract

We study the risk assessment of uncertain cash flows in terms of dynamic convex risk measures for processes as introduced in Cheridito et al. (Electron. J. Probab. 11(3):57–106, 2006). These risk measures take into account not only the amounts but also the timing of a cash flow. We discuss their robust representation in terms of suitably penalised probability measures on the optional σ-field. This yields an explicit analysis both of model and discounting ambiguity. We focus on supermartingale criteria for time consistency. In particular, we show how “bubbles” may appear in the dynamic penalisation, and how they cause a breakdown of asymptotic safety of the risk assessment procedure

Item Type: Article
Official URL: http://link.springer.com/journal/780
Additional Information: © 2012 Springer-Verlag
Library of Congress subject classification: H Social Sciences > HG Finance
Q Science > QA Mathematics
Journal of Economic Literature Classification System: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
Sets: Departments > Statistics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 08 May 2013 15:23
URL: http://eprints.lse.ac.uk/50118/

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