Bid and Ask Prices as Non-Linear Continuous Time G-Expectations Based on Distortions
31 Pages Posted: 18 Mar 2013
Date Written: February 10, 2013
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.
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