Bid and Ask Prices as Non-Linear Continuous Time G-Expectations Based on Distortions

31 Pages Posted: 18 Mar 2013

See all articles by Ernst Eberlein

Ernst Eberlein

University of Freiburg

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

Martijn Pistorius

Imperial College London

Marc Yor

Université Paris VI Pierre et Marie Curie

Date Written: February 10, 2013

Abstract

Probability distortions for constructing nonlinear G-expectations for the bid and ask or lower and upper prices in continuous time are here extended to the direct use of measure distortions. Fairly generally measure distortions can be constructed as probability distortions applied to an exponential distribution function on the half line. The valuation methodologies are extended beyond contract valuation to the valuation of potentially infinitely lived economic activities. Explicit computations illustrate the procedures for stock indices and insurance loss processes.

Suggested Citation

Eberlein, Ernst and Madan, Dilip B. and Pistorius, Martijn and Yor, Marc, Bid and Ask Prices as Non-Linear Continuous Time G-Expectations Based on Distortions (February 10, 2013). Available at SSRN: https://ssrn.com/abstract=2234803 or http://dx.doi.org/10.2139/ssrn.2234803

Ernst Eberlein

University of Freiburg ( email )

Department of Mathematical Stochastics
Eckerstrasse 1
D-79104, Freiburg
Germany
++49 761 203 5660 (Phone)
++49 761 203 5661 (Fax)

Dilip B. Madan (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

Martijn Pistorius

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www3.imperial.ac.uk/people/m.pistorius

Marc Yor

Université Paris VI Pierre et Marie Curie ( email )

175 Rue du Chevaleret
Paris, 75013
France

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