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Project C5: Financial equilibria under Knightian uncertainty

Principal Investigator(s)
Shige Peng
Frank Riedel


Knightian uncertainty (or model uncertainty) is by now a major theme in financial economics. The consequences of Knightian uncertainty for financial markets, in particular concerning volatility uncertainty, remain largely unexplored. This project combines the economic theory of general equilibrium under uncertainty and the newly developed stochastic calculus for non-dominated classes of probability measures (G-calculus) to study the consequences for asset markets. As a long-run goal, we aim to explore equilibrium models based on a continuum of locally interacting agents with the help of new results on stochastic partial differential equations.

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