It is generally believed that excessive stock market volatility reflects non-mathematical market expectations that are driven by “irrational exuberance” or “animal spirits”. As shown in this paper, there is an alternative explanation. If ex-ante and ex-post expectations are calculated in...

We introduce a notion of volatility uncertainty in discrete time and define the corresponding analogue of Pengs G-expectation. In the continuous-time limit, the resulting sublinear expectation converges weakly to the G-expectation. This can be seen as a Donsker-type result for the G-Brownian...