Hi,
within the field of financial engineering I recently came across the
notion of "certainty equivalent" in stochastic modelling.
As far as I got it, the basic idea behind this is that in contrast to a
stochastic modell with, say, 1.000 scenarios for the development of the
capital market the "certainty equivalent scenario" is a single scenario
for the development of the financial world.
The models I am having in mind are not necessarily complete. So I am
certainly interested in effects in arbitrage free, but non-complete
markets, as well.
Does anybody out there have an idea how the notion of "certainty
equivalent" could be rigorously founded and defined and what it is good
for (in what cases)? Perhaps any references?
Thanks in advance.
Best wishes,
J.
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