Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/201606 
Year of Publication: 
2018
Series/Report no.: 
Center for Mathematical Economics Working Papers No. 582
Publisher: 
Bielefeld University, Center for Mathematical Economics (IMW), Bielefeld
Abstract: 
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 without admitting arbitrage. The pricing of zero-coupon bonds in such a setting differs substantially from the traditional models, since the prices need to be chosen in a different way in order to exclude arbitrage.
Subjects: 
Robust Finance
Knightian Uncertainty
Short Rate Model
No-Arbitrage
JEL: 
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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