Econometrics and Finance Seminar: Antoon Pelsser

Pricing and Hedging in Incomplete Markets with Model Ambiguity

Antoon PELSSER, Maastricht University

We search for a robust price of unhedgeable assets and the associated trading strategy in incomplete markets under the acknowledgement of model ambiguity. Our set-up is that we postulate an agent who wants to maximize the expected surplus by choosing an optimal hedging strategy. Furthermore, we assume that the agent is concerned about model mispecification. This robust optimal control problem based on the assumption of model ambiguity leads to: risk-neutral pricing for the traded risky assets and adjusting the drift from the non-traded risk driver in the conservative direction, known as “actuarial” or “prudential” pricing. In a multivariate incomplete market our method yields existence and uniqueness of the robust price.