Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: May, 2021, Volume 89, Issue 3

Viability and Arbitrage under Knightian Uncertainty
p. 1207-1234

Matteo Burzoni, Frank Riedel, H. Mete Soner

We reconsider the microeconomic foundations of financial economics. Motivated by the importance of Knightian uncertainty in markets, we present a model that does not carry any probabilistic structure ex ante, yet is based on a common order. We derive the fundamental equivalence of economic viability of asset prices and absence of arbitrage. We also obtain a modified version of the fundamental theorem of asset pricing using the notion of sublinear pricing measures. Different versions of the efficient market hypothesis are related to the assumptions one is willing to impose on the common order.

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