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It is shown how to construct an arbitrage-free short rate model under uncertainty about the drift and the volatility. The uncertainty is represented by a set of priors, which naturally leads to a G-Brownian motion. Within this framework, it is shown how to characterize the whole term structure...
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Heterogeneous beliefs among market participants can lead to questionable speculative trading that goes beyond any risk … pricing for ambiguous contracts, without compromising legitimate risk-hedging activities. While Arrow-Debreu equilibria …
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